The production budget is the one that comes right after the sales budget. The reason why the latter takes priority is that it is necessary to know the expected sales to establish a production budget.
Thus, by knowing the expected sales, we can establish the number of units to be produced per period.
Free Production Budget
What is a production budget?
This is the second budget to be produced concerning the entire budget process.
In general, the production budget is a plan highlighting the units that must be produced in a given period to meet demand and inventory needs.
The result of a production budget shows the number of units to produce per period. This budget is useful for the manufacturing company. Other types of companies that do not produce their products do not need this budget. For example, in the case of a commercial enterprise, we rather speak of the acquisition of goods.
Production must be optimal for the needs of the company. A business that will hold on to too much inventory is starving itself of cash because the excess inventory will have to be sold before the business sees its money back. Conversely, stock shortages at the right time can cause the company to lose sales opportunities or simply affect the production rate for the coming period.
How to make a production budget?
It is relatively simple to establish a production budget. The biggest challenge is to establish valid hypotheses to have predictions that will be close to reality.
Making a production budget requires using the forecasted periodic sales plus the desired finished goods inventory at the end of the period to get the total production requirements. From the latter are subtracted the stocks of finished products which are already an integral part of the inventory at the beginning of the period.
Thus, the resultant is the production required during the period. The free production budget we offer is built according to monthly periods.
In general, it matches the image below (You can click on the image below).
The image above is small, as it represents the entire production budget and is done over time. Now, let’s break this whole picture down into pieces.
Here is an image that shows the basic explanations of the budget. Note that the boxes in yellow are the only ones that need to be filled in, as the rest will fill in automatically.
As mentioned earlier, the budget is set monthly, so the first four months are shown above.
The forecasted sales come from the sales budget, which must be done before the production budget. Next, we need to convert the forecasted sales into units.
The stocks of finished products desired at the end represent the stocks that you wish to keep in reserve for the next period. They are automatically calculated based on a percentage of forecasted sales for the next period. The next part of the file allows you to insert a percentage that you have defined for your company:
For example, the company in our example expects to sell 30,000 units in the second month. Thus, the stocks of finished products desired at the end are calculated as follows: 30,000 x 20% = 6,000 units
Then, the total needs are calculated by simple addition. In the case of the first month, the calculation of the total needs is as follows: 10,000 + 6,000 = 16,000 units. Of course, these numbers and percentages are arbitrary and vary from company to company.
It is therefore essential to establish a production and storage policy that is as close as possible to the company’s reality. At the beginning of a process, forecasts of desired stocks will surely be difficult to predict. Check your results against forecasts. By analyzing the gaps, you can think about possible improvements. Thus, the data entered in your production budget will be more and more reliable.
Beginning finished inventory is inventory that is already in your inventory at the beginning of the current month. As you can see, you must include the number of units you have in inventory for the first month, but the other periods will be calculated automatically. The reason other periods are automated is that the desired finished goods inventory at the end of one period always represents the finished goods inventory at the beginning of the next period. It is quite simple to understand that the purpose of forecasting what will be left at the end of a period is to make provision for the next period.
The production required for a month is automatically calculated by subtracting the stocks of finished products at the beginning from the total requirements.
You may have noticed in the first small photo that there is a 13th month displayed to determine expected unit sales. This makes it possible to automate the rest of the calculations.
Best way to establish a production budget
Technological innovations offer more and more possibilities to business managers. For several years, MRP (Material requirements planning) software has made it possible to plan the materials needed for production. It is an ideal solution for the SME which has a limited monetary budget to grant the software.
In addition, ERP software exists. These are generally more expensive since it includes several other features. Moreover, ERP systems include an MRP. According to Genius ERP:
“ERPs go beyond MRP, they connect and integrate all the different aspects of your business into one database, allowing you to streamline tasks and processes, as well as share information error-free across the enterprise. your entire business.”
Forecasting and optimizing production are two essential factors for any manufacturing company. As a manager, you need to find the time to establish a plan that will allow your business to become more efficient and optimize its value chain.
Free Production Budget
A Logical Continuation of the Production Budget
What comes immediately after setting up the production budget is the creation of the budgets for raw materials, direct labor, and indirect manufacturing costs.
These arise from the production budget which defines the number of units to be produced per period. The set of all budgets will lead to the creation of the cash budget and forecast financial statements. These are important tools for making informed financial decisions and also for facilitating access to financing. When you send clear forecast information to your banker, he is then able to better sell your reality to credit authorizers. It is therefore essential to clarify the information.
By proving yourself, the banker will have more and more confidence in the quality of the information you submit and your chances of getting what you want from your financial institution will increase.
- Garrison, R. Libby, T., & Webb, A. (2016). «Fondements de la comptabilité de gestion», Chenelière Éducation.