Production Budget:
Learning Objective of
the article:
- Define and explain production budget.
- Prepare a
production budget.
Definition and Explanation of Production Budget:
The production budget is prepared after the
sales budget. The
production
budget lists the number of units that must be produced during each budget period
to meet sales needs and to provide for the desired ending inventory. Production
needs can be determined as follows.
|
|
Budgeted sales in units-------------------
Add desired ending inventory------------
Total need---------------------------------------
less beginning inventory--------------------
Required production-------------------------- |
XXXX
XXXX
--------
XXXX
XXXX
--------
XXXX
===== |
Production requirements for a period are influenced by the desired level of
ending inventory. Inventories should be carefully planned. Excessive inventories
tie up funds and create storage problems. Insufficient inventories can lead to
lost sales or crash production efforts in the following period.
Example of a Production Budget:
Following is the production budget of Hampton
Freeze Inc. (See
explanation of this production budget)
|
Hampton
Freeze, Inc.
Production Budget
For the Year Ended December 31, 2009 |
| |
Quarter |
|
| |
1 |
2 |
3 |
4 |
Year |
|
Budgeted sales (see
sales budget) |
10,000 |
30,000 |
40,000 |
20,000 |
100,000 |
|
Add desired ending inventory of finished
goods* |
6,000 |
8,000 |
4,000 |
3,000 |
3,000 |
| |
------------ |
------------ |
------------ |
----------- |
----------- |
|
Total needs |
16,000 |
38,000 |
44,000 |
23,000 |
103,000 |
|
Less Beginning inventory of finished goods** |
2,000 |
6,000 |
8,000 |
4,000 |
2,000 |
| |
------------ |
------------ |
------------ |
------------ |
------------ |
|
Required production |
14,000 |
32,000 |
36,000 |
19,000 |
101,000 |
| |
====== |
====== |
====== |
====== |
====== |
| |
|
|
|
|
|
|
*Twenty percent
of the next quarters sales. The ending inventory of 3,000 cases is
assumed |
|
**The beginning
inventory in each quarter is the same as the prior quarter's ending
inventory |
At Hampton Freeze, management believes that an
ending inventory equal to 20% of the next quarter's sales strikes the
appropriate balance. Example contains the production budget for
Hampton Freeze. The first row in the production budget contains the budgeted
sales, which have been taken directly from the
sales budget (see
sales budget page). The total needs for the first
quarter are determined by adding together the budgeted sales of 10,000 cases
for the quarter and the desired ending inventory of 6,000 cases. The ending
inventory is intended to provide some cushion in case problems develop in
production or sales increase unexpectedly. Since the budgeted sales for the
second quarter are 30,000 cases and
management would like the ending
inventory in each quarter to 20% of the following quarter's sales, the
desired ending inventory is 6,000 cases (20% of 30,000 cases). Consequently,
the total needs for the first quarter are 16,000 cases. However, since the
company already has 2,000 cases in beginning inventory, only 14,000 cases
need to be produced in first quarter.
Pay particular attention to the year column to
the right of the production budget in the example. In some cases (e.g.,
budgeted sales, total needs, and required production), the amount listed for
the year is the sum of the quarterly amounts for the item. In other cases
(e.g., desired inventory of
finished goods and beginning inventory of
finished goods), the amount listed for the year is not simply the sum of the
quarterly amounts. From the standpoint of the entire year, the beginning
inventory of finished goods is the same as the beginning inventory of
finished goods for the first quarter--it is not the sum of the beginning
inventories of the
finished goods for all quarters. Similarly, from the
standpoint of the entire year, the ending inventory of
finished goods is the
same as the ending inventory of
finished goods for the fourth quarter--it is
not the sum of the ending inventories of
finished goods for all four
quarters.
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