THE RAW MATERIALS BUDGET
The raw materials budget represents the raw materials that will need to be purchased to meet production requirements. When you have determined your production need, you are able to determine your raw material needs. For example, if you need to build a car, you are going to need to buy raw materials such as steel, iron, aluminum, etc. There is always a lead time between purchasing and receiving raw materials for vehicle production and keeping inventory to a minimum.
Raw material planning ensures that raw materials are available, in sufficient quantity and at the right time. If the quantity of raw materials is insufficient then you risk being unable to produce vehicles. If the quantity of raw materials is in surplus then you have to assume additional costs for the storage of raw materials. In addition, larger inventories lead to a negative impact on the company's liquidity.
Raw material requirements are determined in units. They are calculated as follows:
Raw materials for production
Plus: Desired stock of raw materials at the end
Total requirements
Less: Stock of raw materials at the beginning
Raw materials to buy
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