What Is a Production Budget?

Production budget refers to the budget prepared separately for products, arranging product production activities of enterprises within the budget period, and determining the production quantity and distribution of products. In the production budget of a product, the relevant production volume should correspond to its sales volume. In determining the production volume of the budget period, the inventory at the beginning and end of the budget period must also be considered. The calculation formula for the estimated production volume of the product during the budget period is as follows: Estimated production volume = Estimated sales volume 10 Estimated ending inventory 1 Estimated beginning inventory production budget is more complicated when actually prepared, the output is limited by production capacity, and the inventory quantity is affected by the storage capacity Restrictions can only be arranged within this range of inventory quantity and production volume of each period. In addition, in some quarters, sales may be very large. You can increase production by rushing to work. To this end, you must pay extra overtime. If you produce in advance during the off-season, you will pay more interest on funds due to increased inventory. Therefore, you must weigh the gains and losses of the two, and choose the cost The lowest plan. ^[1]

Production budget

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Production budget refers to the budget prepared separately for products, arranging product production activities of enterprises within the budget period, and determining the production quantity and distribution of products. In the production budget of a product, the relevant production volume should correspond to its sales volume. In determining the production volume of the budget period, the inventory at the beginning and end of the budget period must also be considered. The calculation formula for the estimated production volume of the product during the budget period is as follows: Estimated production volume = Estimated sales volume 10 Estimated ending inventory 1 Estimated beginning inventory production budget is more complicated when actually prepared, the output is limited by production capacity, and the inventory quantity is affected by the storage capacity Restrictions can only be arranged within this range of inventory quantity and production volume of each period. In addition, in some quarters, sales may be very large. You can increase production by rushing to work. To this end, you must pay extra overtime. If you produce in advance during the off-season, you will pay more interest on funds due to increased inventory. Therefore, you must weigh the gains and losses of the two, and choose the cost The lowest plan. ^[1]

Production budget is based on

The production budget covers the production process. The company obtains the total production and total output from the sales budget to meet the estimated sales needs during the budget period and the inventory needs prepared for the next period. After completing the production needs, the enterprise can formulate an auxiliary production budget:

1. Raw material budget;

Labor budget

3. Production overhead budget.

In addition to considering the planned sales volume, the production budget must also consider existing inventory and year-end inventory, and determine direct material, direct labor, and manufacturing cost budgets based on the production budget. The product cost budget and cash budget are a summary of related budgets.

Based on the production budget, direct material budget, direct labor budget, and manufacturing cost budget can be prepared.

1. Direct material budget

The budget for direct materials is a procurement budget, and the estimated purchase volume depends on the consumption of production materials and the demand for raw material inventory.

Calculation formula:

Estimated purchase amount of direct materials = Estimated production quantity × Material usage per unit product + Expected direct material inventory at the end of the period-Expected direct material inventory at the beginning of the period = Expected production required amount + Expected direct material inventory at the end of the period-Expected direct material inventory at the beginning of the period

Estimated purchase amount of direct materials = Estimated purchase amount of materials × Estimated unit price of materials

In order to facilitate the preparation of a cash budget, in the direct material budget, the expected unit price of the material refers to the average price of the material, which is usually available from the purchasing department. It also usually includes the calculation of expected cash expenditures on materials, including the cash paid for the materials purchased in the previous period and the cash paid for the materials in the current period.

2. Direct labor budget

The direct labor budget lists the direct labor hours required for production based on the estimated production volume and the corresponding costs.

Direct labor costs are usually obtained from the production management department and engineering technology department. According to the production labor budget, the direct labor and production volume per unit of output can be used to prepare a direct labor budget.

Calculation formula:

Estimated Total Direct Labor Cost = Estimated Production Volume × Direct Labor Hours per Product × Unit Labor Hours Wage Rate

3 Manufacturing cost budget

Manufacturing costs are indirect costs incurred to produce a product other than direct materials and direct labor.

There is no easily identifiable input-output relationship in the manufacturing cost project, and its budget needs to be prepared according to external factors such as production level, the willingness of the management authority, long-term production capacity, company policy and national tax policy.

Considering the complexity of manufacturing costs, in order to simplify the preparation of the budget, the manufacturing costs are usually divided into variable manufacturing costs according to cost characteristics.

Usually includes power, maintenance costs, direct materials, indirect materials, indirect manufacturing labor, etc. The key to calculating variable manufacturing costs is to confirm which specific items are variable and choose the basis for cost allocation. And fixed manufacturing costs usually include depreciation of plant and machinery and equipment, rents, property taxes and management costs of some workshops. They support the overall production and operation capabilities of the enterprise. Once formed, they will not change in the short term. Two categories and different budgeting methods.

Calculation formula:

Estimated manufacturing expenses = Estimated variable manufacturing expenses + Estimated fixed manufacturing expenses = Estimated business volume × Estimated variable manufacturing expenses allocation rate + Estimated fixed manufacturing expenses

The preparation of manufacturing costs usually also includes the calculation of projected cash expenditures in order to provide the necessary information for the preparation of the cash budget.

4 End-of-period finished product inventory budget

Inventory planning and control can enable enterprises to ensure the smooth production and sales with as little inventory as possible. The preparation of the inventory of finished products at the end of the period not only provides information for preparing the estimated balance sheet, but also provides data for product sales costs for preparing the estimated profit and loss statement.

The basic steps of preparation are:

(1) Calculate and determine the unit cost of the finished product according to the budget of direct materials, direct labor, changes and fixed manufacturing costs;

(2) Multiplying the unit cost of finished products by the estimated inventory of finished products at the end of the period will give you the estimated inventory of finished products at the end of the period.