Direct Material forecast is directly related to the forecasted sales units. Once you know how much you plan to sell, you can begin to forecast the units you need to fulfill your sales requirement. However, there are other factors that affect the actual quantity bought besides the number of units you plan to sell as discussed below

1. MyBusinessKPI.com
Predicting Direct Material
COST PRODUCT
Business

2. Direct Materials
Direct Material forecast is directly related
to the forecasted sales units

3. Determine the standards for
making your product
Start your direct material forecast by computing the quantity you
need to meet your sales forecast
I will be illustrating my point by using examples from my sample bakery shop
10 cups ready
to bake flour
5 cups of
cooking oil
Prep time for one
cake: 35 minutes
Bake time for one
cake: 45 minutes

4. Include an allowance for normal waste
An allowance should be added for
normal wastage
Sales forecast = 1,000 cakes
Flour = 10,500 ((10*5%) *1,000 cakes)
Oil = 5,250 ((5*5%) * 1,000 cakes)

5. External factors to consider before finalizing
number of units to purchase
How much inventory
you need on hand
besides what is
needed for production
Whether the market
has enough output to
meet your sales
forecast

6. Market supply
Analyzing market supply, allows me to answer the question, "Are
there any crisis going on in my external environment that could
hamper my supply of flour"?
It’s good business practice to be aware of what is going on in your industry

7. Business capacity
Do I have access to the financial resources
required, how much ingredients can I store
at a time, etc

8. Quantities at which
economies of scale occur
Sometimes my vendor might give a special discount for buying more. I have to consider If I have
the financial resources and business capacity to handle the extra units
For example, that extra inventory might mean
I have to increase
marketing by another
5% to sell the excess
products
Increase the
amounts of items
I have to store
(Do I have the
storage
capacity?)
Have more cash
tied into
inventory (Do I
have the financial
resources?)

9. Quantity Purchased Summary
• Make allowance for normal wastage
• Consider external factors like:
• Industry supply
• Business capacity
• Economies of scale

10. Price per unit
Once I have decided the quantities I need for my budgeting period, I
can now forecast my price per unit as follows
Price = (Industry value chain cost) * (Markup for scarcity or Markdown for surplus) *
(Markup for inflation)

11. Industry value chain cost
The value chain analysis is the cost of the (resource owners + all
convergent agents) * their markup
(Resource owner cost * Resource owner markup) *(Markup for the number of touch
points in the industry value chain before the goods gets to you)

12. Markup for scarcity/
markdown for surpluses
The materials I need are usually scarce in my local area. This affects
what I will be paying for oil
In my case I will have to add a 30% markup due to the scarcity of the product in my area

13. Markup for inflation
Overtime the price of goods go up, you can use historical data to
predict what percentage price might go up. Or you can just use the
current inflation rate of 1.06%

14. Price Estimation
After my analysis I come up with a unit price for flour of $4.50 and
$2.40 for oil as follows

15. The Direct Material Budget
The lower your cost the higher your profitability
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16. Predictive Accounting with KPIs: A More
Predictable, Less Stressful Way to Run Your
Business.
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