SESSION 6

RAW MATERIAL BUDGET

&
DIRECT LABOR BUDGET

BY
D R . A N U B H A S R I VA S TAVA
 LEARNING OUTCOME

L01 -The performance of raw material budget

L02 - The performance of direct labor budget

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 L01- - THE PERFORMANCE OF RAW
MATERIAL BUDGET

The quantities of raw material need for each final product is estimated
through material budget . In order to assure that raw material will be
available in required quantities at right time and estimate the cost of raw
material , it is required to make

1- Details budget specifying the quantity required and cost of material

required for desired production called material budget
2- A related budget for raw material purchases and cost called material
purchase budget

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 MATERIAL BUDGET

Purpose of making material budget

• To provide quantity data for the purchase department

• To provide data for inventory policy
• To provide data for controlling raw material usage
 MATERIAL PURCHASE BUDGET

Purpose of making material purchase budget-

• To provide information about quantity of raw material to be

purchased
• To determine the timing of purchase
• To provide information about the estimated cost of raw
material
 INVENTORY POLICY

Preparation of detail plan regarding raw material requires planning and control of raw
material estimation, inventories and purchases. The following factors should be
considered

• Timing and quantity of the needs of the factory

• Economies in purchasing to have quaintly discount
• Storage facility
• Perishability
• Capital requirements
• Cost of storage
• Opportunity cost

Material budget and material purchase budget can be used as performance

evaluation tool
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 MATERIAL BUDGET-UNIT REQUIREMENT
(REF; SCHEDULE 25 PG NO 225 BY GLENN A
Details Jan Feb March 1qtr
Product x 70000 80000 80000 230000
RM A for Dept I 1unit 70000 80000 80000 230000
RM B for Dept II 2unit 140000 160000 160000 460000
RM C for Dept III 3unit 140000 160000 160000 460000
Product y 34000 36000 38000 108000
RM A Dept I 1unit 34000 36000 38000 108000
RM B Dept III 1unit 34000 36000 38000 108000
Total mat req.
RM A Dept 1 104000 116000 118000 338000
RM B Dept II 140000 160000 160000 460000
RM B Dept III 34000 36000 38000 108000 7
 MATERIAL PURCHASE BUDGET

RM Units needed for Finished goods production (Material budget

input) xxxx
Add desired closing inventory of RM xxxx
Total Raw material required xxxx
Less beginning inventory of RM (xxxx)
Units to be purchased xxxx
Units purchase price x
Total purchase cost xxxx

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 MATERIAL PURCHASE BUDGET
(REF; SCHEDULE 26 PG NO 228 BY GLENN A)
RM Units req. +Cl. inv. Total (Open.inv.) units price cost
Raw Material A
Jan 104000 208000 312000 (220000) 92000 $.30 27600
Feb 116000 232000 348000 (208000) 140000 42000
Mar 118000 240000 358000 (232000) 126000 37800
1 qtr 338000 240000 578000 (220000) 358000 107400

Raw Material B
Jan 174000 350000 524000 (360000) 164000 $.20 32800
Feb 196000 380000 576000 (350000) 226000 45200
Mar 198000 400000 598000 (380000) 218000 43600
1 qtr 568000 400000 968000 (360000) 608000 121600

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 PRACTICE QUESTION

1-Case 7-6
Conway manufacturing company
Pg No 239 by Glenn A

2- Case 7-7
Simple producst compnay
Pg No.240 by Glenn A

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 L02 - THE PERFORMANCE OF DIRECT LABOR BUDGET

The total direct labor required and estimated total labor cost for
each final product is estimated through Direct labor budget.
Technically direct labor budgets has two sub components -

1- Details budget specifying the labor hours required for desired

production is called direct labor hours budget
2- A related budget for total labor hours and cost is called direct
labor cost budget.
 DIRECT LABOR COSTS

approaches to the development of direct labor budget –

• Estimate the standard labor hours per unit of output and

estimate the usage rate , then multiply
• Estimate direct ratio of labor cost to some measure of volume or
output
 DIRECT LABOR HOURS

Four commonly used approaches-

• Time and motion studies

• Standard cost
• Direct estimate by supervisor
• Statistical estimate by a staff group

Direct labor budget can be used as performance evaluation

tool as well.
 DIRECT LABOR COST BUDGET
(REF; SCHEDULE 30 PG NO 252 BY GLENN A)

Details Total labor cost for product x

Total Units to std. Total Rate
labor cost be produced hrs p.u std. hrs. per hr Amt
Jan
Dept I 70000 .4 28000 $2 56000
Dept II 70000 .2 14000 $1.5 21000
Dept III 70000 .4 28000 $1 28000
Feb
Dept I 80000 .4 32000 $2 64000
Dept II 80000 .2 16000 $1.5 24000
Dept III 80000 .4 32000 $1 32000
 DIRECT LABOR HOUR BUDGET
(REF; SCHEDULE 31 PG NO 252 BY GLENN A)

Dept I Dept II
Total Pro x Pro Y total Pro X pro Y total
Jan 83600 28000 6800 34800 14000 - 14000
Feb 94400 32000 7200 39200 16000 - 16000
March 95200 32000 7600 39600 16000 - 16000
1st Quarter 273200 92000 21600 113600 46000 - 46000
 PRACTICE QUESTIONS

1-case 8-3
Pocono corporation
Pg no 258 by Glenn A

2-Case 8-4
Bostrand company
Pg No 259 By Glenn A
Thank you