Production budget

accounting

The production budget is the document by which the level of manufacturing of stocks or performance of services is foreseen.

This document specifies with particular attention the costs that the company is expected to incur in carrying out its production and the units to be manufactured or produced.

Production budget formula

To calculate the production budget it is necessary to take into account the following factors:

  • Initial inventory.
  • Final inventory.
  • Expected sales.
  • Expected production.

Using each factor we would have the following formula:

Although the only factor that we know exactly is related to initial stocks, the rest are forecasts resulting from the objectives and goals that the company sets for itself. On the other hand, except for the production units which are second forecasts of the equation, and the factor that is most important in the budget.

Production budget benefits

The production budget is key in controlling the activity of the company, since it partly determines other budgets, such as sales, income and expenses.

Using this budget can bring the following business benefits:

  • Reduce superfluous expenses.
  • Improve inventory management.
  • Greater efficiency in the production process.
  • Optimal management of the company's capital.

Although these are the main advantages and they are usually given in a general way, depending on the intrinsic characteristics of the company, more advantages may be given. An example is the effectiveness of inventory rotation in perishable producer sales companies (food, etc.).

Production budget example

Given a company that plans to sell 90,000 units of product, having an initial inventory of 30,000 and a final inventory of 15,000 units.

How many units should be produced taking into account the forecasts and exposed data?

Taking into account the equation, the result will be 105,000 units to be able to choose to own 30,000 units at the end of the year, anticipating 90,000 of total sales.

Sales budget

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