Topic 6

THE PRODUCTION BUDGET

 The Production Budget
… is a detailed plan showing the number of
unit a company must produce
to meet budgeted sales and inventory
levels

 Production managers use this information for

planning the materials and human resources
that production activities will be required
The Production Budget (cont’d)
 To prepare a production budget,
managers must know
 The number of sales budget
 The level of ending finished goods inventory
for each period
 Often stated as a percentage of the next period’s
budget unit sales
 The Production Budget

Sales Production
Budget Budget
t ed
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om
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Production must be adequate to meet budget

sales and provide for sufficient ending inventory.
 The purpose of production budget is
determined by considering factor as follows :
1. The sales plan
2. The machine capacity
3. Work capital
4. The facility
5. The firms policy of finishing inventory
6. The firm policy of production pattern
(stable or unstable)
The Production Budget (cont’d)
 To determine the production needs for an
accounting period
Total Budgeted Ending Finished Beginning Finished
Production = Sales in + Goods Inventory – Goods Inventory
Unit Unit required required
 Computing Unit to be Produced

Unit to be produced = Expected unit sales +

Units in ending
inventory – Units in
beginning inventory
 Steps in arranging Production Budget

 Determine level of inventory

 Determine product that is produced during
period
 Scheduling production (monthly, quarterly,
etc)
 Determine level of inventory
Determination of raw material or finished goods each
month did by as follows:
1. Adjusted by it requirement per month
a. If material requirement / goods is the same each month
therefore utilized by average method to determine level
inventory.
 Example:

Goods requirement one year = 12.000 units

Therefore requirement per month = 12.000 X 1 unit  1000 unit
12
If firm establishes that inventory that will be established as
much 2 months inventory, therefore the inventory = 2 x 1000 =
2000 units.
b. If material requirement / goods each month unequal (surge)
therefore used by moving average method.
 Example:
Monthly requirement:
January = 2000 unit
February = 1000 unit
March = 1500 unit
April = 2000 unit
May = 3000 unit
Therefore monthly requirement with averagely moves:
February = 2000 1000  1500
 1500 unit
3
March = 1000 1500  2000 1500 unit
3
If firm determines inventory in the amount of two months
requirement ,therefore it inventory:
Month of February = 2 x 1500 = 3000 unit
Month of March = 2 x 1500 = 3000 unit
2. By determining beforehand maximum
bounds and minimum inventory. This
method just can be done by firm already
experienced deep sell its product.
3. By calcultaing inventory turnover.
Example:
Determination inventory by calculating inventory turnover:
CITRA company’s sell plan up to year 2015 as follows:
Q I. 500 units ,Q II. 500 units ,Q III. 600 units, Q IV. 800 units
Beginning inventory of finished goods 600 unit, firm will increase inventory turnover 5 times one
year.

Determine ending inventory that company must have.

Inventory turnover = sales

average inventory
Average inventory =
beginning inventory  ending inventory
2
Inventory turn over zoom one year = 5 times
Beginning inventory= 600 unit
Ending inventory = X unit
Therefore:
5= 500  500  600  800
600  X
5( 600 + X) = 2. 400 X 2 2
3000 + 5X = 4.800
5X = 1.800
X = 360  ending inventory
 Methods determining inventory

 Average method
 Moving average method
 The calculate of turn over inventory
Turn over inventory = sales
inventory average
 Arrange theProduction Budget

1. The policy consider that the most important is

production stability
2. The policy consider that the most important is
inventory stability
3. Combined
1. Policy that accentuate production stability

Level of inventories fluctuate meanwhile total production relativily

constant each month / quarter.

Example: sales plan of 2015 on ALFIN company as follows:

Month sales (Unit)

January 1.500
February 1.600
March 1.600
April 1.400
May 1.200
June 1.000
July 700
August 600
September 900
October 1.100
November 1.200
December 1.400
Beginning inventory 2000 unit
Ending inventory 1.500 unit

Of data upon requested to arrange production budget with a policy

that accentuate production stability.

a). Total products have to be produced for year 2015 as follows:

sales 2015 14.200 units
ending inventory 1.500
Required product of 2015 15.700
beginning inventory 2.000
Total production 13.700 units
b. Divide total production of 2015 into budget period
(monthy/quarterly) :
Dividing level production of a year so rounded number resulted and
easy to be performed precisely. The rest will be allocated to the
month where have high sales, as follows:

Production of 2015 are 13.700

Monthly production 13.700
 1.141,67 unit
12
Easy integer executed and approaches that number is 1.100 unit.
If monthly production 1.100 unit , therefore to its reducing is 13.700 –
(1. 100 X 12)=500 unit.
Lack for 500 unit are allocated to the month which increase its
supreme sales which is:
January 1.500 unit
February 1.600 unit
March 1.600 unit
April 1.400 unit
December 1.400 unit
 So to five months that each will get affix
as much:
500
X1unit  100 unit
5
 company
Production Budget
2015
 company
Production Budget
2015

Jan Feb Mar Apl May Jun Jul Augst Sept Okt Nov Dec total

Sales 1.500 1.600 1.600 1.400 1.200 1.000 700 600 900 1.100 1.200 1.400 14.200

End.inv. 1.700 1.300 900 700 600 700 1.100 1.600 1.800 1.800 1.700 1.500 1.500

Total req. 3.200 2.900 2.500 2.100 1.800 1.700 1.800 2.200 2.700 2.900 2.900 2.900 15.700

Begin.inv. 2.000 1.700 1.300 900 700 600 700 1.100 1.600 1.800 1.800 1.700 2.000
Total
Production 1.200 1.200 1.200 1.200 1.100 1.100 1.100 1.100 1.100 1.100 1.100 1.200 13.700
2. Policy That Accentuate Stability / Inventory Control:
Constant/ stable inventory , let production fluctuates.
 Previously, determined the estimation of beginning inv. And ending

inv. And to get inventory level required from month to month/

quarter, used as follow:
 Calculate difference among beginning inventory and ending

inventory diveded by certain number to get round result and

implemented easily.

Example for ALVIN wcompany, Inventory control:

Beginning inv. = 2.000 units
Ending inv. = 1.500
Difference = 500

So, 500 X1unit 100 unit,

5
This policy for allocating depend on company.
 ALVIN company
Producction Budget
2015

Jan Feb Mar Apl May Jun Jul Agst Sept Okt Nov Dec total

Sales 1.500 1.600 1.600 1.400 1.200 1.000 700 600 900 1.100 1.200 1.400 14.200

End. Inv. 1.900 1.800 1.700 1.600 1.500 1.500 1.500 1.500 1.500 1.500 1.500 1.500 1.500

Total 15.700

Begin. Inv. 2.000 2.000

Production 13.700
 ALVIN company
Producction Budget
2015

Jan Feb Mar Apl May Jun Jul Agst Sept Okt Nov Dec total
Sales 1.500 1.600 1.600 1.400 1.200 1.000 700 600 900 1.100 1.200 1.400 14.200

End. Inv. 1.900 1.800 1.700 1.600 1.500 1.500 1.500 1.500 1.500 1.500 1.500 1.500 1.500

Total 3.400 3.400 3.300 3.000 2.700 2.500 2.200 2.100 2.400 2.600 2.700 2.900 15.700

Begin. Inv. 2.000 1.900 1.800 1.700 1.600 1.500 1.500 1.500 1.500 1.500 1.500 1.500 2.000

Production 1.400 1.500 1.500 1.300 1.100 1.000 700 900 900 1.100 1.200 1.400 13.700
3. Combine policy
both production and inventory are let arbitrary, even that contrived
regular happening balance among inventory and production.
Example:
If fresh SIRUP firm utilize combine policy with policy on Q.I and II.
stable inventory, and Q. III. and IV. stable production therefore
budget production can be arranged as follows:
 Fresh SIRUP company
Production Budget (bottle)
2015

Quarter
For a
year
I II III IV
Sales 43 45 47 47 182
End.inv. + 11 11 13 15 15
Ready sold 54 56 60 62 197
Begin.inv. _ 10 11 11 13 10
Production 44 45 49 49 187