How to prepare a Production Budget.

How to prepare a Production Budget

  • For the production manager to know how much to produce during the budgeted period, obviously he/she needs to know the sales budgeted. Only then can he consider the production capacity and also to take account the planned closing stocks of finished goods.
  • Once the volume of production is ascertained, he has to prepare a statement of expected manufacturing costs. Costs should be classifie into fixed and variable costs to allow for flexible budgeting.
  • In the initial stages,the production budget is in terms of quantity.Later the quantity is expressed in terms of costs.
  • Production budgets are based on sales, machine utilization,purchasng, labor and overhead budgets. Hence it is a summary of all those budgets
  • Production budgets may be analyzed by products, producton departments and period
  • The key factors must be determined before adopting a plan.
  • The size and nature of the business will influence the preparation of production budgets.

Level of production is computed as follows:

  • The level of production in any period is determined as follows:

Planned volume of units in stock at the end of the period
Planned volume of sales
Volume of units in stock at the start of the period
=Planned level of production for the period

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