9/4/2021

MANAGEMENT ACCOUNTING
BUDGETS PER FUNCTION ‐ 3

The production budget

Main author: Isabelle GIGNON‐MARCONNET

Blended learning implementation: Anne PERRET
Translated and adapted by Henry CLAVIJO

Budgets per function

DÉMARCHE À SUIVRE

The production program D3

Numerical example D7

Verifying production capacity D 12

The production budget D 16

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Budgets per function

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The production program

Budgets per function

SEQUENCING OF ACTIVITY PROGRAMS AND

BUDGETS BY FUNCTION
Quantity forecast Monetary forecast
Sales budget : Revenue forecast
Sales program

Sales admin. expenses (included

 Products Inventory 1 + Inventory 2 in or excluded from the marketing
 Production capacity tests budget)

Production program Production budget

Raw materials inventory 1 +

Purchasing budget
inventory 2
Purchasing program Operating budget purchasing dept.

Support function budgets

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Budgets per function

PRODUCTION PROGRAMMING AND BUDGETING

Inventory objectives Sales objectives

Global production
program for the
period

Is there enough
production capacity
over the period?

No
Yes

Production Investment in
Program production
capacity or use
of external
Production resources 5
budget

Budgets per function

DETERMINE THE PRODUCTION

PROGRAM

Sales units forecasted

+ Planned ending units of inventory ‐
‐ Beginning Inventory
Total à souligner parce pour avoir un t rai
= Units to be produced

Monthly program
Monthly program Linear of irregular
of constant production production
production YES ? NO
= Just‐in‐time

Facilitates production management

Non‐optimization of available resources
and/or
Need for a buffer inventory
Cost of using external resources
 Inventory carrying cost
Lower inventory carrying cost 6
 Risk of inventory depreciation

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Budgets per function

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Numerical example

Budgets per function

PRODUCTION PROGRAM
Regular production
Expected sales: 3,100 units in the trimester
Inventory beginning of January 200 units
Desired inventory end of March 100 units

Quantity to be produced in the trimester: 3,100 – 200 + 100 = 3 000 units

Planned production program: 3,000 units /3 months = 1,000 units/month

Month January February March

Beginning
200 350 350
inventory
+ Production 1,000 1,000 1,000

‐ Sales, in units 850 1,000 1,250

= Ending
350 350 100
inventory
=> No stock out
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=> Disadvantage: inventory carrying cost

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Budgets per function

PRODUCTION PROGRAM
Production in relation to sales
Expected sales: 3/100 units in the trimester
Inventory beginning of January 200 units
Desired inventory end of March 100 units

Quantity to be produced in the trimester: 3,100 – 200 + 100 = 3,000 units

Planned production program: 3,000 units /3 months = 1,000 units/month

Month January February March

Beginning
200 350 350
inventory
+ Production 1 000 1 000 1 000

‐ Sales, in units 1 250 1 000 850

= Ending
Problème ! 350 100
inventory
=> 50 units missing
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=> Production program must be modified
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Budgets per function

PRODUCTION PROGRAM
Just‐in‐time production
Expected sales: 3,100 units in the trimester
Inventory beginning of January 200 units
Desired inventory end of March 100 units
Month January February March
Ending Inventory 100 100 100

+ Sales, in units 850 1 000 1 250

‐ Beginning inventory 200 100 100

Production 750 1 000 1 250

=> Lower inventory carrying cost

=> Production capacity for 1,250 units?
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=> Increase in production capacity or use of subcontractors, temporary workers…?

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Budgets per function

PRODUCTION PROGRAM
CALCULATING THE INVENTORY CARRYING COST
Let’s assume that the inventory carrying cost is 10€ per unit

Total
Month January February March trimester
Just‐in‐time production,
100 100 100
Ending inventory
Inventory carrying cost 1 000 1 000 1 000 3 000 €
Regular production,
350 350 100
Ending inventory
Inventory carrying cost 3 500 3 500 1 000 8 000 €

 Just‐in‐time production minimizes inventory and inventory carrying costs

 but generates sub‐activity costs and/or external resource costs
 Regular production optimizes production costs,
 But generates inventory related costs: Inventory carrying cost, depreciation 11

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Contrôle de gestion – les budgets par fonction

03
Verifying production
capacity

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Budgets per function

PROGRAMMING APPROACH AND PRODUCTION

BUDGETING
Inventory
Sales objectives
objectives
Global production
program for the period

Regular or
irregular
Regular production? Irregular

Test one month Test each

month
Is there enough
production capacity
for the period?
Yes
No

Production
program
investment to
Production expand production 13
budget capacity

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Budgets per function

NUMERICAL EXAMPLE:
PRODUCTION PROGRAM
Production requirements for products A and B
Labor hours Machine hours
Product A 1 hour 2 hours

Product B 2 hours 3 hours

Production capacity: 5,500 labor hours and 7,000 machine hours

Expected production: Product A, 1,000 units and Product B, 2,000 units

Labor hours Temps machine

Capacity used by Produit A 1.000 hours 2,000 hours

Capacity used by Produit B 4,000 hours 6,000 hours

Total 5,000 hours 8,000 hours

=> 1,000 machine hours are missing

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=> Program modification or capacity adjustment => strategic implications

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Budgets per function

PRODUCTION PROGRAMMING AND BUDGETING

Inventory
Sales objectives
objectives
Global production program
for the period

Regular or
irregular
Regular production? Irregular

Test each
Test one month month
Is there enough
production capacity Decided my
General Mgmt.
for the period?
Yes
Program No
modification
Production
program
Capacity
Production adjustment 15
budget

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Budgets per function

04
The production budget

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Budgets per function

NUMERICAL EXAMPLE: DLH: 5,000 h/ month – 16€/h

Employer’s social security contributions = 40 % of gross salary
PRODUCTION BUDGET 3 machines– 120 000 €/machine depreciated over 10 years,
straight‐line method
Maintenance : 2 000 €/month/machine
Inventory carrying costs ; 1 000 €/month
Production expenses
Month Oct. Nov. Dec. Total
Gross salaries, workshop 80 000 € 80 000 € 80 000 € 240 000 €

Employer’s social security

contributions 32 000 € 32 000 € 32 000 € 96 000 €
Total production payroll 112 000 € 112 000 € 112 000 € 336 000 €

Machines maintenance 6 000 € 6 000 € 6 000 € 18 000 €

Depreciation expense 3 000 € 3 000 € 3 000 € 9 000 €
Inventory carrying costs 1 000 € 1 000 € 1 000 € 3 000 €
Total other production
expenses 10 000 € 10 000 € 10 000 € 30 000 €

Total production expenses 122 000 € 122 000 € 122 000 € 366 000 €
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Budgets per function

CHECK YOUR UNDERSTANDING AND

COMPREHENSION OF THIS TOPIC

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