Production Budget
Manufacturing companies prepare production budgets, unlike merchandising firms (wholesalers and retailers), which only prepare a purchasing budget as illustrated previously. Some grocery retailers, such as Kroger, have both retail stores and manufacturing plants for specialized products (dairy, ice cream, cheese, bakery, bottling, etc.), thus requiring both types of budget preparation, production and purchases budgets. (Garrison, Noreen, Brewer. Managerial Accounting, 15th edition. McGraw Hill, p. 354)
Sales drive the level of production. Production is also a function of the beginning finished goods inventory and the desired ending finished goods inventory. In planning production, one must give careful consideration to the productive capacity, availability of raw materials, and similar considerations.
In a manufacturing environment, the inventory relationship is translated as:
Beg. Finished Goods + Goods Manufactured = Units Sold + End. Finished Goods
This basic relationship can be algebraically flipped to determine required production.
Budgeted Sales + Desired End. Finished Goods - Beg. Finished goods = Required Production.
Translated: All inventory needed to meet sales forecasts and maintain a desired level of inventory in stock represents the total inventory needs of the company. Not all of it must be produced because there is inventory in the warehouse at the beginning of the period, thus subtracting the beginning inventory to determine the amount that needs to be produced during the current period.
Following is a multiple period illustration of the process of determining budgeted requirements for a frozen confectionary manufacturer. Carefully examine this information, paying very close attention to how each period's desired ending finished goods can be tied to the following period's planned sales taken from the sales budget.
Source: principlesofaccounting.com, Larry M. Walther, Copyright 2016.
Source: principlesofaccounting.com, Larry M. Walther, Copyright 2016.
Activity
Please complete the following activity.