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Production Budget

Production Budget


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Published by ankitapr1988

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Categories:Types, Business/Law
Published by: ankitapr1988 on Apr 14, 2010
Copyright:Attribution Non-commercial


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Prepared by :-


Contents :y Production Budget. y Production Cost Budget. y Direct Material Budget. y Direct Labour Budget. y Factory Overheads.

y A firm prepares a production budget after determining

the number of units that it expects to sell. y A production budget is a plan for acquiring the resources needed to carry out the manufacturing operations to satisfy the expected sales and maintain the desired ending inventory. y The total number of units to be produced depends on the budgeted sales, the desired units of finished goods ending inventory, and the units of finished goods beginning inventory

y After preparing the sales budget, the production

budget is prepared a production budget is stated in physical units. It specifies the no. of units is each product that must be produced to satisfy the sales forecasts and to achieve the desire level of closing finished goods inventory. Essentially, the production budget is sales budget adjust for inventory changes as follows: y Kerry expects to have 5,000 units on hand on April 1 and wants to have 30% of the following month¶s projected unit sales on hand at the end of each month.

y Determining the budgeted units of production:-

Budgeted production (in units) = Budgeted (sales in units) + Desired ending inventory(in units) ± Beginning inventory(in units).
y The production budget, like other budgets, is

detailed by months or quarters along with a tentative annual budget. further, budget are prepared for every production centre for comparison with actual production


Production Budget

ales in units + Desired ending finished goods inventory = Total units required

Total units required - Expected beginning finished goods inventory = Units to be produced
1st 2nd 3rd 4th Year 15,000 5,000 10,000 20,000 50,000

Sales in units Add desired ending inventory of finished goods Total units required Less expected beginning inventory of finished goods Units to be produced

500 1,000 2,000 1,500 1,500 15,500 6,000 12,000 21,500 51,500

1,500 500 1,000 2,000 1,500 14,000 5,500 11,000 19,500 50,000

0% of next quarter¶s expected sales

0% of first quarter of next year¶s expected sales of 5,000

Production cost budget
y A production cost budget summarizes the material

budget, labor budget, the factory overhead budget, and may be expressed departments and or products. A production cost budget, also known as a manufacturing budget is made up of three budgets: (1)Direct materials y (2)labour y (3)factory overhead.

Direct materials budget
y The information in the production budget becomes the

basis for preparing several manufacturing-related budgets. y A direct materials usage budget shows the direct materials required for production and their budgeted cost. y This budget specifies the cost of direct materials used and the cost of the direct materials purchased below the figure explains the calculation of the direct materials budget. The usage part of the direct materials budget determines the cost of purchases of direct materials.

Direct materials budget
y The direct material budget is useful in the y

y y y

following ways: 1.it helps the purchasing department to prepare a schedule to ensure delivery of materials when needed. 2.it helps in fixing minimum and maximum levels of inventories in the store department. 3.it helps the finance manager to determine the financial requirements to meet production targets. The materials budget usually deals with direct materials only .

Direct materials budget
y supplies and indirect materials are:-

Total direct materials needed in production + Desired direct materials ending inventory = Total Direct materials purchase for the period + Direct material beginning inventory


Direct Material Budget
Shows the number of units and the cost of material to be purchased and used
1st 2nd 5,500 x 1.5 3rd 11,000 x 1.5 4th 19,500 x 1.5 Year 50,000 x 1.5

nits to be produced Required per unit (yards) Required for production (yards) dd desired ending inventory (yards) Total required Less expected beginning inventory (yards)

14,000 x 1.5

Total raw material required Expected beginning inventory of raw material = Raw material to be purchased Raw materials required for production + Desired ending inventory = Total raw material required






825 21,825

1,650 9,900

2,925 19,425

2,100 31,350

2,100 77,100


825 9,075 x $2 18,150

1,650 17,775 x $2 $35,550

2,925 28,425 x $2 $56,850

2,100 75,000 x $2 $150,000

Purchases (yards) 19,725 Cost per yard x $2 Total cost $39,450

y To prepare the direct labor budget, a company would

use its production budget y The direct labor budget enables the personnel department to plan for hiring and repositioning of employees y A good labor budget helps the firm to avoid emergency hiring, prevent labor shortages, and reduce or eliminate the need to lay off workers y Firms usually prepare labor budget for each type of labors. For example, for each skill requirement.


Direct-Labor Budget

Shows the number of hours and the cost of direct labor to be used during the budget period
nits to be produced Direct-labor required per unit Total direct-labor hours required Direct-labor cost per hour Total direct-labor cost st 14,000 x .2 nd 5,500 x .2 rd 11,000 x .2 th 19,500 x .2 ear 50,000 x .2

2,800 x $10 x

1,100 $10 x

2,200 $10 x

3,900 $10

10,000 x $10




$39,000 $100,000

For either strategic business reasons or ethical concerns, many companies try to maintain a relatively stable labor force. If production employees are retained when production declines, the labor force will not be a unit-level cost.

Factory Overhead Budget
y A factory overhead budget often includes all

production costs other than direct materials and direct labor.
y Unlike direct materials and direct labor, manufacturing

overhead costs include costs that vary in direct proportion with the units manufactured as well as costs that vary with either the kind of facilities the firm has or the way in which the firm carries out it operations

actory Overhead


Shows the cost of overhead expected to be incurred in the production process during the budget period
Indirect material Electricity for machinery
Unit-level costs atch-level costs $8,400 $3,300 $6,600 $11,700 $30,000 Product-level $1,000 $1,000 $1,000 $1,000 $4,000 costs acility and gen'l operations level costs $36,500 $36,500 $36,500 $36,500 $146,000 otal overhead ess depreciation otal cash disbursements for overhead $51,500 $43,000 $48,500 $57,000 $200,000 $15,000 $15,000 $15,000 $15,000 $60,000 st $5,600 nd $2,200 rd $4,400 th $7,800 ear $20,000

Setup Purchasing & material handling Inspection Design Supervisory salaries Insurance and property taxes Maintenance Utilities Depreciation

$36,500 $28,000 $33,500 $42,000 $140,000


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