Final answer:
The direct materials budget is created based on the production budget, which determines the necessary quantity and cost of raw materials for the projected production needs.
Step-by-step explanation:
The direct materials budget is prepared using information from the production budget. The production budget outlines the number of units that need to be produced to meet sales demands and inventory requirements. Based on the production budget, the direct materials budget estimates the quantity and cost of raw materials required to meet the production targets.
It is crucial to get this step right, as the direct materials budget impacts subsequent budgets, such as the direct labor budget and manufacturing overhead budget, which together make up the total manufacturing budget. An accurate direct materials budget is also essential for the master budget, which is a consolidation of all individual budgets within the company.