Video 3 - Direct materials budget

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Budgeting essentials and development

29 calificaciones

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Fundação Instituto de Administração

Budgeting essentials and development

29 calificaciones

The Budgeting Essentials and Development course focus on an integrative and practical view of concepts, methods, and techniques to develop a budget. After finishing this course, learners will be able to: - Develop the budget with a broad view of the corporate functions; - Integrate the strategic guidelines into the discussions of budgeting process; - Structure the budget planning and development in a logical sequence - Coordinate the project of budget planning with the different areas of the company - Actively promote assumptions discussions to improve the process of developing the budget - Apply financial concepts to support the budget planning process - Design a budget monitoring and control model to support the performance management - Evaluate the performance of the company by managing the results and the budget In this course, learners will have a deeper understanding of the budgeting process, its challenges, common issues, and approaches to mitigate the problems and improve the learning curve of budget planning. It is integrative by emphasizing the transition between the corporate strategy and the budget. It is practical by following a structured process of going through a framework that illustrates and demonstrates how to analyze, develop and control the budget.

De la lección

Module 3.1 - The company operations and the Budget

In this module, the discussion goes through a step-by-step framework to support the budget development. Each of the steps represents a relevant component of the budget, and the links between the budget of each area of the company are discussed. The integration of the different area's budget is one of the primary objectives of this module, which will lead learners to an integrative view of the budget development. And this integration is the key learning objective of the module.

Video 1 - The ending inventory budget3:51

Video 2 - Production budget5:06

Video 3 - Direct materials budget5:12

Video 4 - Direct materials: Combining Methods4:09

Conoce a los instructores

Alberto Sansiviero Jr.
MBA
FIA Futures Studies Program
Samantha Mazzero
MSc, MBA, BS Math
FIA Profuturo – Futures Studies Program
Nelson Yoshida
Ph.D., MBA, B.Eng.
FIA Profuturo – Futures Studies Program
Roberto Dumas Damas
M.Sc., CFA
FIA Profuturo - Futures Studies Program
Fernando Fleury
Ph.D.
FIA Profuturo - Futures Studies Program

[SOUND]

Hi welcome back.

We just saw how to integrate the ending year inventory budget with

production budget.

Now what next?

We'll go through direct materials budget,

since this is a consequence of the production budget.

Remember where we are in our framework, direct materials,

you can see the highlight there.

Direct materials involve all raw materials, components,

and parts consumed to make the products.

They typically represent a great deal in the total cost of the products.

Therefore it is important to invest time in developing a good

budgeting on direct materials.

Before starting the discussion, bear in mind that direct materials budget

is not intended to support purchase area in their day by day work.

Supply and procurement applies other tools and business support systems to do it.

Of course, they use direct materials budget to guide them.

But it's not the idea to base all the procurement process on it.

That said, let's look at the budgeting approaches for direct materials.

We can develop the budget by rolling up direct materials costs

based on estimation of production.

That's the method one, the roll-up method.

Another approach is to calculate the historical percentage

of direct materials cost within the revenue.

And this is the method 2, the historical data.

So starting the discuss method 1, the roll-up method.

In this method we projected data in the budgeted period.

Look at this example here.

We can see in the table that the physical number of units sold of product line X

is the starting point.

In the example, we consider only raw material A.

And it's not only for deductical purpose.

That's because the direct materials budget should also serve as a reference

to estimate how exposed the company is to the supply channels.

In this case here, direct material A.

In other words, the company may have some threats or

even opportunities in the materials budget analysis.

By consequence, it's good to have the breakdown of direct materials budget,

at least for the most relevant materials.

So the budget serves for a more strategic analysis,

whereas the procurement area will rely on a more operational approach.

Observe also that the same concept of ending and

beginning inventory is applied here, but in this case the unit of analysis

is the direct materials inventory, not the finished good inventory.

We saw that the defining the ending and

beginning inventories will have impact in the direct materials budget.

Invest time in this analysis, because any mistake, tiny mistake here,

can lead the company to buy excess of materials, or to a lack of them.

Either way, the company may lose money.

Now we discuss the historical data method, this approach assumes that

the direct materials cost maybe estimated by a percentage of the revenue.

And this assumption is useful because in the roll-up method,

we cannot properly include the estimation of wasted materials,

the rework and spoilants that occur in the manufacturing process.

Not all companies are able to estimate them.

Therefore, by applying the percentage of the revenue as a model to estimate direct

material costs, we can sum up these variables into a single line and

fine tune the costs of direct materials.

Look at this example here.

In the case 45.3% of the adjusted revenue is the cost of direct materials.

We can adjust the cost by including expectations on industrial

process improvement, such as waste reduction,

new technologies to add in the production process.

Not to mention that we may also change the materials mix in the product formulation.

In the end, you have a new adjusted percentage,

which will be used to estimate the costs of direct materials for product X.

Now, between us, you might be wondering hey Nelson,

why don't we combine both methods, the roll-up method with the historical method?

I would say absolutely.

Let's do it.

But maybe it's better to do it in the next video.

Read the materials about the direct materials budget.

Do the assessments, stay tuned, and see you soon.

Bye. [SOUND]

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