Production budget

Production Budget Definition

The production budget calculates the number of units of products that must be manufactured, and is derived from a combination of the sales forecast and the planned amount of finished goods inventory to have on hand (usually as safety stock to cover for unexpected increases in demand). The production budget is typically prepared for a "push" manufacturing system, as is used in a material requirements planning environment.

The production budget is typically presented in either a monthly or quarterly format. The basic calculation used by the production budget is:

+ Forecasted unit sales

+ Planned finished goods ending inventory balance

= Total production required

- Beginning finished goods inventory

= Products to be manufactured

It can be very difficult to create a comprehensive production budget that incorporates a forecast for every variation on a product that a company sells, so it is customary to aggregate the forecast information into broad categories of products that have similar characteristics.

The planned amount of ending finished goods inventory can be subject to a considerable amount of debate, since having too much may lead to obsolete inventory that must be disposed of at a loss, while having too little inventory can result in lost sales when customers want immediate delivery. Unless a company is planning to draw down its inventory quantities and terminate a product, there is generally a need for some ending finished goods inventory.

Production Budget Example

As an example of a production budget, ABC Company plans to produce an array of plastic pails during the upcoming budget year, all of which fall into the general Product A category. Its production needs are outlined as follows:

ABC Company

Production Budget

For the Year Ended December 31, 20XX