What is and how to make a Production Budget?

The production budget constitutes a financial plan used by manufacturing companies to obtain an estimate of the amount they owe produce. In this sense, it is the delimitation of the quantity of products to be manufactured during the budgeted period and under certain conditions.

It is only a part of the operational budget and in turn this is a part of the final budget of a company. So the budgets form a sequential chain that allows the proper functioning of the company.

The purpose of the production budget, is to help establish a balance between quantities that are produced and those that are sold, therefore it collects and expresses how many units of product must be manufactured to cover the expected sales and on the other hand what are the needs of the Inventory.

How to make a production budget?

In order to make a production plan correctly, you need to adopt politics linked with the search for the

efficiency and the stability of the production process, since to obtain positive results in the market it is essential to pay equal attention to inventory and production.

The production budget It must be calculated and carried out for each type of product separately and taking into account the number of units. It should also be done after the sales budget, since it depends directly on it.

The bases to successfully carry out this budget are:

• Determine and express the number of finished products, the total production need.
• Establish the work capacity of the different teams that participate in the production process and assign them specific tasks.
• Define the availability of raw materials, supplies and labor.
• Analyze the consequences, whether they are positive or negative. During and after the manufacturing process.

The following calculation is developed to know the quantity that needs to be produced:

Units to be sold + (more) units to be kept in inventory - (minus) the units that exist in inventory = (equal) the total number of units due produce.

To estimate the cost of the units to be manufactured, the costs of all raw materials and what it costs to transform, including the use of human resources, are considered. depreciation of machinery, technology and use and costs of supplies.

It can be classified into:

• Production volume budget: It refers to the quantities that must be produced, considering the quantity that is expected to be sold.
• Production cost budget: Indicates the total cost of the units to be produced, provides elements of link between the budgeted, the results and the budgets of operation and of cash register.

Advantages offered by the Production Budget

• Maintains inventories at optimal levels.
• Minimizes difficulties and protects the supply of products against risks of shortage of raw materials.
• It guarantees the necessary existence of products ready to satisfactorily serve customers.
• It allows the rotation of inventory representing a state of greater liquidity for the company.
• It allows programming the needs and purchases of raw materials.
• It facilitates the concentration of production on the items with the greatest movement.