Production Budget

Production Budget:
Learning Objective of the article: 1. Define and explain production budget. 2. Prepare a production budget.
Definition and Explanation of Production Budget:
Theproduction budgetis prepared after thesales budget. Theproduction budgetlists the number of units that must be produced during each budget period to meet sales needs and to provide for the desired ending inventory. Production needs can be determined as follows. | Budgeted sales in units-------------------
Add desired ending inventory------------Total need--------------------------------------- less beginning inventory--------------------Required production-------------------------- | XXXX
XXXX
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XXXX
XXXX
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XXXX
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Production requirements for a period are influenced by the desired level of ending inventory. Inventories should be carefully planned. Excessive inventories tie up funds and create storage problems. Insufficient inventories can lead to lost sales or crash production efforts in the following period.
Example of a Production Budget:
Following is the production budget of Hampton Freeze Inc. (See explanation of this production budget) Hampton Freeze, Inc.
Production Budget
For the Year Ended December 31, 2009 | | Quarter | | | 1 | 2 | 3 | 4 | Year | Budgeted sales (see sales budget) | 10,000 | 30,000 | 40,000 | 20,000 | 100,000 | Add desired ending inventory of finished goods* | 6,000 | 8,000 | 4,000 | 3,000 | 3,000 | | ------------ | ------------ | ------------ | ----------- | ----------- | Total needs | 16,000 | 38,000 | 44,000 | 23,000 | 103,000 | Less Beginning inventory of finished goods** | 2,000 | 6,000 | 8,000 | 4,000 | 2,000 | | ------------ | ------------ | ------------ | ------------ | ------------ | Required production | 14,000 | 32,000 | 36,000 | 19,000 | 101,000 | | ====== | ====== | ====== | ====== | ====== | | | | | | | *Twenty percent of the next quarters sales. The