05 Jul What is a Production Budget?
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DefinitionThe 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.