Production Budget Definition Template Example Of Production Budget

Production Budget Definition

Components

Mainly there are three components, and they are as follows:

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#1 – Direct Material Budget

The Direct Material budget includes the opening inventory of raw materialsInventory Of Raw MaterialsRaw materials inventory is the cost of products in the inventory of the company which has not been used for finished products and work in progress inventory. Raw material inventory is part of inventory cost which is reported under current assets on the balance sheet.read more, purchase cost of raw material, material that goes into production, and closing inventory of raw material that will be incurred to produce the units of product that the organization estimates to produce in the coming period.

#2 – Direct Labor Budget

Direct labor budget includes the cost of labor employed in a production like wages, bonuses, commission, etc., that are expected to be payable to the workers of the business organizations.

#3 – Overhead Cost Budget

All the other costs that don’t constitute a part of the material and direct labor budgets are shown in the overhead budgetOverhead BudgetOverhead Budget is prepared to forecast and present all the expected costs concerning manufacturing the goods that the company expects to incur in the next year. It excludes the direct material and the direct labor cost and the information of which becomes part of the cost of the goods sold in the master budget.read more cost. This budget consist of both variable cost as well as a fixed costFixed CostFixed Cost refers to the cost or expense that is not affected by any decrease or increase in the number of units produced or sold over a short-term horizon. It is the type of cost which is not dependent on the business activity.read more.

Example of Production Budget

XYZ ltd manufactures the bottle and makes the forecast for the upcoming year, which ends in December 2020. It forecasted that the sales in the next year would be $ 8,000 in quarter 1, $ 9,000 in quarter 2, $ 10,000 in quarter three and $ 11,000 in quarter 4. The production manager also plans that the ending inventory will be $ 1,000 at the end of each quarter of the company’s production. At the beginning of the quarter, one company’s inventory was $ 2,500.

Prepare the necessary production budget of the company XYZ ltd for the coming year ending in December 2020.

Solution

Following is the production budget template of XYZ ltd for the year ended on December 31, 2020.

Production Budget of XYZ ltd for the Year Ended December 31, 2020

Thus in the above example, the budget prepared shows the calculation regarding the number of units to be produced.

Also, as planned, the production manager’sThe ending inventory formula computes the total value of finished products remaining in stock at the end of an accounting period for sale. It is evaluated by deducting the cost of goods sold from the total of beginning inventory and purchases.read more ending inventoryEnding InventoryThe ending inventory formula computes the total value of finished products remaining in stock at the end of an accounting period for sale. It is evaluated by deducting the cost of goods sold from the total of beginning inventory and purchases.read more units are decreased from $ 2,500 to $ 1,000 even though the company’s production is expected to increase every quarter. So it is a risky forecast because a company’s safety stock level is cut.

Advantages

It helps maintain an optimum balance between the sales, inventory position, and production of the company and contributes to the coordination of policies and plans related to them.It provides guidance or plan to the organization as it gives the production target that the management of the company expects to be achieved in the upcoming period.With the target being set using the production budget, it motivates the company employees to work hard to achieve the goals in time and more efficiently.With the help of this budget, the plant and machinery, as well as its labor, can be utilized to the maximum possible extent by the company.

Disadvantages

Preparing the company’s production budget is a time-consuming process as it requires lots of time and effort to manage the company.It is based on the judgment and the estimates of the management, so achieving an adequate and accurate level of a forecast of the company’s production is not generally possible in the present competitive, unpredictable market.Everyone in the organization has different mindsets and ways of thinking, so the different persons in the company may have different opinions about the production budget. In that case, employees of the organization might not be willing to accept this budget, which is prepared by the company’s top-level management.For a company that started working recently and does not have past data and experience, it becomes very difficult to estimate the figures for the production budget.

Important Points

The different important points to the budget are as follows:

There are mainly three types of components of the production budget, which include the Direct Material budget, the Direct Labor budget, and the overhead costOverhead CostOverhead cost are those cost that is not related directly on the production activity and are therefore considered as indirect costs that have to be paid even if there is no production. Examples include rent payable, utilities payable, insurance payable, salaries payable to office staff, office supplies, etc.read more budget.For a company that started working recently and does not have past data and experience, it becomes very difficult to estimate the figures for the production budget compared with a business that has existed for a long time because of the availability of the past trends for them.

Conclusion

Different organizations in the market adopt different types of strategies and policies. The production budget forecasts the production of the business and gives the targets to employees of the company for achieving the desired output efficiently and incurring minimum expenses. Also, the preparation of this budget is more cumbersome and problematic for the small organization due to the presence of fewer resources, and they can experience more levels of market fluctuations when compared with the large businesses.