Final answer:
The direct materials budget is necessary before the production budget to forecast raw material costs, which ensures the company has enough funds for production and facilitates the calculation of average profit and potential profit optimization.
Step-by-step explanation:
The direct materials budget must be completed before the production budget because it provides essential information regarding the quantity and cost of raw materials necessary for production. Estimating these costs is crucial for developing a realistic production plan and ensuring that the company has sufficient funds to cover the expenses associated with manufacturing. This prioritization helps businesses to understand the relationship between production and costs, which is fundamental to maintaining financial stability.
A thorough approach in planning includes evaluating the corresponding factor price of every factor of production, which allows for an analysis of short-run costs, encompassing total cost, fixed cost, variable cost, marginal cost, and average cost. Only after determining these elements can the company calculate average profit and make informed decisions to optimize the potential profit and adhere to the financial requirements laid out in the budget.