Preparation of Production Budget: The preparation of a production budget is the process of determining the budgeted production of any period, say one year. The budgeted production of any period is determined on the basis of sales forecast, level of finished goods inventory proposed to be held at the end of the year after making adjustment for the opening balance of manufactured goods.
Steps in Preparing Production Budget
In short, the preparation of a production budget, generally, involves the following steps –
(1) Recasting of Sales Budget : Goods are generally produced for sale. Hence the quantity of output to be manufactured during a given period is largely determined by the sales forecast. Hence, sales budget shows the quantity of production required for sales. When sales budget has been prepared, it is forwarded to the factory manager taking into consideration the inventory policies of the organization recasts the figures of sales budget. Then he determines the quantity of actual production to be produced during the year.
(2) Studying Various Limiting Factors : After recasting the sales budget and studying inventory policies, the factory manager makes a study of various limiting factors of production. There are three basic factors which govern the quantity to be manufactured during a given period. They are raw material supply, labor supply and plant capacity.
For this purpose, separate budgets are developed for example, materials budget, labor budget and plant capacity utilization budget. They all ensure the continuous and smooth supply of raw materials and labor etc.
(3) Product-wise Analysis : This step consists of breaking down the budgeted figures of production into its ultimate parts- different products. Then product-wise output forecast should be developed after taking into consideration various limiting factors. Then this production forecast has to be properly timed in different control periods.
(4) Scheduling : Scheduling of production is the process of allocating production quantities of different products throughout the different control periods. It is just like a time-table which portrays the time to production in terms of the units.
(5) Studying Managerial Policies : While preparing a production budget, the factory manager must consider the top management policies as regards to product diversification, capital expenditures and depreciation and maintenance policies etc. Besides the managerial policies, a great deal of other information is also studied as historical costs of production, departmental manufacturing capacity, material specifications and product engineering factors etc. The main theme of this budget is how many units of finished products need to be produced in the budget year. That means:
Units A required for sale 10000
Add: closing stock of finished goods 8000
Total units A Required 18000
Less: opening Stock 5000
Units A to be produced 13000
In the same way, the process can be repeated for product B and C and so on. The quarterly figures can be broken into monthly figures also In the same way additional information about work in progress (if any) can be added to the budget.