In manufacturing company, production budget is so important. Without making this, we can waste our working capital in manufacturing of goods due to more production than actual need for sale. By making production budget, we can produce almost correct products, so, saved working capital can be used other operation of business.
Basically, every departmental budget is the base of other budget. Sale budget is the base of production budget. Now, production budget is the base of material purchase budget. We can not buy the product on the better estimation of production budget. Only production budget will tell us what quantity of production we need. So, we will buy the same quantity from market.
In above formula, it is clear, for making production budget, we need sale budget, from sales budget, we can can show the estimated units of sales. If we are making monthly production budget, previous month's closing stock estimation will be estimated opening stock of this month. So, on this basis, we can estimate 12 months' production budget.
Why is Production Budget Needed?
Basically, every departmental budget is the base of other budget. Sale budget is the base of production budget. Now, production budget is the base of material purchase budget. We can not buy the product on the better estimation of production budget. Only production budget will tell us what quantity of production we need. So, we will buy the same quantity from market.
Meaning of Production Budget
In simple words, production budget is the estimation of quantity and value of products which will be produced in the factory. This numerical estimation is done on the basis of estimated value of sale and after checking of others like current finished stock of products.
Steps to Make Production Budget
On the basis of following is its simple formula, we take the simple steps
Budgeted Products
Foretasted units of sales
Add Estimated Closing stock of finished stock at the end of this year
Less Estimated Opening Stock of Finished Stock
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Estimated products quantity required
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In above formula, it is clear, for making production budget, we need sale budget, from sales budget, we can can show the estimated units of sales. If we are making monthly production budget, previous month's closing stock estimation will be estimated opening stock of this month. So, on this basis, we can estimate 12 months' production budget.
1st Step : To Calculate the Estimate Quantity of Sale
In the estimation, if sale is less, we will produce less. In the estimation, if sale is huge, quantity of production will increase. So, this is major factor.
We more focus on the estimation of units of production. For example : estimated sales will be in different unit, we have to convert it in production unit. For example, we have the business of blank papers. We sell papers in ream but produce in quires. So, you should know basic measurement which is following
25 sheets = 1 quire
500 sheets = 20 quires = 1 ream
1,000 sheets = 40 quires = 2 reams = 1 bundle
5,000 sheets = 200 quires = 10 reams = 5 bundles = 1 bale
On this basis, you can estimate batter production units. This is a single industry, there are lots of industry, you know all the inventory units measurements.
2nd Step : To Calculate the Estimated Quantity of Closing Stock of Finished Stock
Some sale, we can not estimated. So, for future quick sale, we need to keep some stock in hand. So, it should be estimated.
Example
Following is its simple example :
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