The production budget of a company is used to determine the number of product units that need to be made for the company to satisfy its sales budget for a certain amount of time. The production budget is presented not in monetary amounts but rather in the units of the product that are to be produced. It is determined from the sales budget of the firm as well as the number of units of safety stock that the business intends to maintain on hand.
However, for the company to know how many goods to manufacture, it is necessary to first calculate the sales budget before calculating production budget. When developing a sales budget for a new product, it may be challenging to predict customer demand levels accurately. You can do market research to find out what other comparable companies charge for the goods. You are able to utilize historical information such as prior sales if the product has already established itself in the market. Also, take into account any changes in the prevailing economic circumstances that may have an impact on your company.
Why the Production Budget Is Important
Considering the sales budget for the same period as the production budget, you may determine how much of your product you need to produce within a certain time. The quantity of the product you are obligated to produce has repercussions for your labor force, your production facility, the requirements for the equipment you must acquire, and the supplies you must buy. These categories each have their own sub-budgets, which are organized as follows: raw materials budget, direct labor budget, and overhead budget.
The initial inventory of the product that the company has in stock is included in the production budget. The ending inventory, also known as the completed products inventory, is carried over from one quarter to the next to create the starting inventory for the next quarter.
The company's inventory management method relies heavily on the production budget, making it an essential component overall. You want to ensure you always have enough of your goods on hand to avoid running out, but you don't want to keep so much that you're stuck with outdated stock. The company loses customers' goodwill and storage space when there are stockouts, while outmoded inventory costs the company money.
Production Budget Example
Sue is the sole proprietor of a little bakery that employs only the two. Sue is the only owner of the company, and she employs just one person. Sue is interested in projecting the number of loaves of rye bread she has to produce each quarter to meet her sales budget. This is the production budget for Sue's movie.
Budget for the Production of Goods at Sue's Bakery for the Fiscal Year that Ended on December 31, 20XX
Sue's first projection for sales was for an increase, followed by a decrease in the fourth quarter. The sales budget provides the information for the first line, which is the expected unit sales. It is anticipated that the ending finished products inventory will remain unchanged at 250 units for the year. This is the emergency supply that the firm has on hand. The third item on the list is the production needed to meet the anticipated sales while accounting for a buffer supply. In line item 5, the completed product inventory at the end of the quarter will serve as the starting inventory for the next quarter. After deducting that number from the necessary production amount, Sue now has the number of loaves of bread she must manufacture.
Conclusion
If, rather than being a service provider, your company is a product manufacturer, creating production budget is necessary to ensure that your firm stays on track with its operations. The production budget is often the next budget to be prepared after the sales budget, and its creation is dependent on a wide range of financial forecasting techniques, such as income statements and balance sheets. You will be in a better position to comprehend your company's requirements if you can acquire the knowledge necessary to organize and compute a production budget.
