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1. External financial reporting decisions
2. Planning, budgeting, and forecasting
3. Performance management
4. Cost management
5. Internal control
6. Technology and analytics
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2.5.1.3 Production budget
Achievable CMA Part 1
2. Planning, budgeting, and forecasting
2.5. Annual profit plan and supporting schedules
2.5.1. Operational budgets
Our CMA Part 1 course is currently in development and is a work-in-progress.

Production budget

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Learning outcome statements

The learning outcome statements relevant for this section are:

  1. explain the relationship between the sales budget and the production budget
  2. identify the role that inventory levels play in the preparation of a production budget and define other factors that should be considered when preparing a production budget
  3. prepare a production budget

The production budget outlines the quantity of units that must be produced within a specific period to meet the anticipated sales demand and inventory requirements. This budget is crucial for ensuring that production aligns with sales projections, avoiding both shortages and excess inventory.

Operating budget - production budget component
Operating budget - production budget component

Relationship between sales budget and production budget

The sales budget is a primary driver of the production budget. Since sales projections dictate the quantity of goods expected to be sold, the production budget must align with these projections to ensure adequate supply without overproducing. By accurately forecasting production needs, companies can better manage costs, optimize resources, and maintain adequate inventory levels.

It is good to note that the production budget involves the units of finished goods needed to satisfy the sales forecasted in the sales budget. The breakdown and dollar costs of these units of finished goods are determined in the succeeding budgets on direct materials, direct labor and overhead.

In the context of GreenLine Furniture, the Q4 sales forecast of 5,000 units directly influences the company’s production requirements. The production budget will also consider inventory levels to ensure that sufficient units are available without exceeding demand.

Role of inventory levels in production planning

Inventory levels play a pivotal role in developing an accurate production budget. Companies often maintain a certain amount of inventory on hand, called beginning inventory, to ensure smooth operations and cover unexpected demand. Ending inventory (the desired amount of inventory on hand at the end of a period) is also essential, as it affects the production needs for the current period and ensures availability for future sales periods.

The formula used to determine the units that need to be produced, incorporating inventory levels, is:

Required production units=Projected sales units+Desired ending inventory−Beginning inventory

Preparation of the production budget

For GreenLine Furniture, let’s assume the following:

  • The sales budget forecasts 5,000 units needed for Q4 (see “projected units sold” in the Sales Budget).
  • Desired ending inventory for the end of October and November is two thirds of the next month’s projected sales to meet anticipated sales in the following period.
  • Desired ending inventory for the end of December is 1,000 units to meet anticipated sales in the following period.
  • Beginning inventory at the start of October is 500 units.

Input the provided details

Using GreenLine’s Q4 forecast and the information provided we can input the following data below. Note that some of the information is unknown on a monthly basis but we can work them out through some assumptions.

Month Projected sales (units) Desired ending inventory Beginning inventory Required production (units)
October 1,200 1,000 500 -
November 1,500 1,533 - -
December 2,300 1,000 - -
Total 5,000 -

Input beginning inventories

Using the assumption that the ending inventory of the previous month is the projected beginning inventory of the next month, we should be able to fill-in additional details.

Month Projected sales (units) Desired ending inventory Beginning inventory Required production (units)
October 1,200 1,000 500 -
November 1,500 1,533 1,000 -
December 2,300 1,000 1,533 -
Total 5,000 -

Use the formula to determine the required production each month

We can then use the formula to determine the required production in units. After these, we are left with the following production budget for GreenLine for Q4:

Month Projected sales (units) Desired ending inventory Beginning inventory Required production (units)
October 1,200 1,000 500 1,700
November 1,500 1,533 1,000 2,033
December 2,300 1,000 1,533 1,767
Total 5,000 5,500

The monthly required production in units are computed as follows:

October required production

Required production units​=Projected sales units+Desired ending inventory−Beginning inventory=1,200 units+1,000 units−500 units=1,700​

November required production

Required production units​=Projected sales units+Desired ending inventory−Beginning inventory=1,500 units+1,533 units−1,000 units=2,033​

December required production

Required production units​=Projected sales units+Desired ending inventory−Beginning inventory=2,300 units+1,000 units−1,533 units=1,767​

In this example, GreenLine Furniture would need to produce a total of 5,500 units in Q4 to meet sales demand and ensure sufficient ending inventory for the next period. This production budget will guide GreenLine’s direct materials, labor, and overhead requirements, linking the production plan with subsequent budgets.

Relationship between sales budget and production budget

  • Sales budget drives production budget planning
  • Production budget ensures enough units for forecasted sales
  • Aligns production with sales projections to manage costs and inventory

Role of inventory levels in production planning

  • Beginning inventory: units on hand at period start
  • Desired ending inventory: units to have at period end for future sales
  • Required production formula:
    • Required Production Units = Projected Sales Units + Desired Ending Inventory − Beginning Inventory

Preparation of the production budget

  • Input projected sales, desired ending inventory, and beginning inventory for each period
  • Use prior month’s ending inventory as next month’s beginning inventory
  • Calculate required production per period using the formula

Production budget example (GreenLine Furniture Q4)

  • October: 1,700 units required production
  • November: 2,033 units required production
  • December: 1,767 units required production
  • Total Q4 required production: 5,500 units
    • Ensures sales demand and inventory needs are met

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Production budget

Learning outcome statements

The learning outcome statements relevant for this section are:

  1. explain the relationship between the sales budget and the production budget
  2. identify the role that inventory levels play in the preparation of a production budget and define other factors that should be considered when preparing a production budget
  3. prepare a production budget

The production budget outlines the quantity of units that must be produced within a specific period to meet the anticipated sales demand and inventory requirements. This budget is crucial for ensuring that production aligns with sales projections, avoiding both shortages and excess inventory.

Relationship between sales budget and production budget

The sales budget is a primary driver of the production budget. Since sales projections dictate the quantity of goods expected to be sold, the production budget must align with these projections to ensure adequate supply without overproducing. By accurately forecasting production needs, companies can better manage costs, optimize resources, and maintain adequate inventory levels.

It is good to note that the production budget involves the units of finished goods needed to satisfy the sales forecasted in the sales budget. The breakdown and dollar costs of these units of finished goods are determined in the succeeding budgets on direct materials, direct labor and overhead.

In the context of GreenLine Furniture, the Q4 sales forecast of 5,000 units directly influences the company’s production requirements. The production budget will also consider inventory levels to ensure that sufficient units are available without exceeding demand.

Role of inventory levels in production planning

Inventory levels play a pivotal role in developing an accurate production budget. Companies often maintain a certain amount of inventory on hand, called beginning inventory, to ensure smooth operations and cover unexpected demand. Ending inventory (the desired amount of inventory on hand at the end of a period) is also essential, as it affects the production needs for the current period and ensures availability for future sales periods.

The formula used to determine the units that need to be produced, incorporating inventory levels, is:

Required production units=Projected sales units+Desired ending inventory−Beginning inventory

Preparation of the production budget

For GreenLine Furniture, let’s assume the following:

  • The sales budget forecasts 5,000 units needed for Q4 (see “projected units sold” in the Sales Budget).
  • Desired ending inventory for the end of October and November is two thirds of the next month’s projected sales to meet anticipated sales in the following period.
  • Desired ending inventory for the end of December is 1,000 units to meet anticipated sales in the following period.
  • Beginning inventory at the start of October is 500 units.

Input the provided details

Using GreenLine’s Q4 forecast and the information provided we can input the following data below. Note that some of the information is unknown on a monthly basis but we can work them out through some assumptions.

Month Projected sales (units) Desired ending inventory Beginning inventory Required production (units)
October 1,200 1,000 500 -
November 1,500 1,533 - -
December 2,300 1,000 - -
Total 5,000 -

Input beginning inventories

Using the assumption that the ending inventory of the previous month is the projected beginning inventory of the next month, we should be able to fill-in additional details.

Month Projected sales (units) Desired ending inventory Beginning inventory Required production (units)
October 1,200 1,000 500 -
November 1,500 1,533 1,000 -
December 2,300 1,000 1,533 -
Total 5,000 -

Use the formula to determine the required production each month

We can then use the formula to determine the required production in units. After these, we are left with the following production budget for GreenLine for Q4:

Month Projected sales (units) Desired ending inventory Beginning inventory Required production (units)
October 1,200 1,000 500 1,700
November 1,500 1,533 1,000 2,033
December 2,300 1,000 1,533 1,767
Total 5,000 5,500

The monthly required production in units are computed as follows:

October required production

Required production units​=Projected sales units+Desired ending inventory−Beginning inventory=1,200 units+1,000 units−500 units=1,700​

November required production

Required production units​=Projected sales units+Desired ending inventory−Beginning inventory=1,500 units+1,533 units−1,000 units=2,033​

December required production

Required production units​=Projected sales units+Desired ending inventory−Beginning inventory=2,300 units+1,000 units−1,533 units=1,767​

In this example, GreenLine Furniture would need to produce a total of 5,500 units in Q4 to meet sales demand and ensure sufficient ending inventory for the next period. This production budget will guide GreenLine’s direct materials, labor, and overhead requirements, linking the production plan with subsequent budgets.

Key points

Relationship between sales budget and production budget

  • Sales budget drives production budget planning
  • Production budget ensures enough units for forecasted sales
  • Aligns production with sales projections to manage costs and inventory

Role of inventory levels in production planning

  • Beginning inventory: units on hand at period start
  • Desired ending inventory: units to have at period end for future sales
  • Required production formula:
    • Required Production Units = Projected Sales Units + Desired Ending Inventory − Beginning Inventory

Preparation of the production budget

  • Input projected sales, desired ending inventory, and beginning inventory for each period
  • Use prior month’s ending inventory as next month’s beginning inventory
  • Calculate required production per period using the formula

Production budget example (GreenLine Furniture Q4)

  • October: 1,700 units required production
  • November: 2,033 units required production
  • December: 1,767 units required production
  • Total Q4 required production: 5,500 units
    • Ensures sales demand and inventory needs are met

More from Operational budgets

  • Introduction
  • Sales budget
  • Direct materials budget
  • Direct labor budget
  • Overhead budget