Production budget can be defined as the estimation or calculation of total number of units of products that must be manufactured in that budgeting period in order to achieve estimated sales. The derivation of production budget is done through forecasted sales and the inventory of finished goods currently in hand of the company. The use of production budget is extensive in environment where material is to be purchased on the biases of total requirement of the manufacturing or production. In most of the companies the production budget is presented monthly or quarterly according to the management decisions.
The calculation of production budget can be done as under:-
Production Budget or Total Production required = forecasted sales of units + finished goods inventory in hands
Products to be manufactured = Total goods required – beginning inventory of finished goods
Most of the times it is difficult to design a complete and hundred percent accurate production budgets as the sales forecast has a number of variations and sales may vary with each good sold in the market. The amount of ending inventory must be planned very carefully as defined by the production budget as large amount of finish goods may result in obsolete inventory that results in disposing of a large number of finished goods.
The emphasis of the production budget is on the estimation of the unit of goods produced regarding the sales forecast. The production budget is not related to the transformation of units into cash. Other budgets that acquire information from the production budget are direct labor budget, direct material budget and other budgets related to production.
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