05 Jul Production Budget
What is a Production Budget?
Definition: The production budget contains details of the number of units that are intended to be produced by a business in a particular period. This budget is made after the preparation of the sales budget. It helps a company to plan its manufacturing schedule and ensure that it produces an adequate quantity of goods.
What does Production Budget mean?
A production budget could be made on a monthly, quarterly, or a yearly basis. A firm can plan its raw material procurement strategy on the basis of this budget.
When a company is making its production budget, it needs to consider three factors:
- How many units does it intend to sell during the budget period? This information will be obtained from its sales budget.
- What is the number of units of inventory that it holds at the beginning of the budget period? Data about the number of units in stock will be available from the company’s records.
- How many units does it want to have in stock at the end of the period? A company would always like to have a certain number of units of the goods that it manufactures in its inventory. This buffer will ensure that it does not lose sales in the event of an increase in demand.
When it has this information at hand, the company can start preparing its production budget. The production plan of a company can be calculated in the following manner:
Number of units to be produced = Number of units expected to be sold + Desired closing inventory – Opening inventory.
Example of a Production Budget
Finlay Corporation, a manufacturer of office chairs, is preparing its production budget for the October to December quarter of 2018. The company estimates that it can sell 7,000 units in the last three months of the year. Its opening stock is 2,000 office chairs, and it would like to maintain its inventory at the same level at the end of the quarter.
This is the production budget for Finlay Corporation for the October to December quarter:
The production budget allows a company to plan its manufacturing activity. It is prepared after taking the sales budget into account as well as the opening and closing inventory.