The production budget estimates how much it costs to manufacture the quantity of products a company expects to sell.
The budget is the document or template that includes estimates of income and expenses for a certain time period. Generally, a budget is used to calculate how much money it will cost to complete a project or develop an activity.
Production , for its part, is a concept that is used to name the process of producing (creating, manufacturing) something and even to name what has been produced.
What is a production budget
This allows us to approach the notion of production budget , which is used in the field of companies and industries. The production budget is linked to the sales budget , since it consists of calculating how much it will cost to manufacture the number of products that a firm plans to sell. This allows costs to be analyzed and compared to the expected revenues and profits.
The purpose of the production budget, therefore, is to help achieve a balance between what is produced and what is sold . This budget includes how many units of a product must be manufactured to cover expected sales and inventory needs.
The production budget must take into account the cost of raw materials and their transformation.
The calculation
The production budget develops the following calculation : units that are expected to be sold + the units that are intended to be in the final inventory – the units that are expected in the final inventory = total number of units that must be produced.
To estimate the cost itself of what must be manufactured, the costs of raw materials and their transformation must be considered, including the use of technological resources and human resources .
To correctly develop a production plan, it is necessary to adopt certain policies related to the search for efficiency and stability in the manufacturing process , make optimal use of the facilities and achieve a balance of finished products and those under construction. In other words, to obtain positive results in the market it is essential to pay equal attention to production and inventories .
Issues to consider when preparing a production budget
The calculation of the production budget must be carried out for each type of product in particular and taking into account the number of physical units. The bases to do it successfully are the following:
* determine the total production needs , which must be expressed in number of finished products;
* establish the work capacity of the company and the team or teams to which a task related to the production process has been assigned;
* define the availability of labor and raw materials ;
* analyze the potential consequences, both negative and positive, of the duration of the manufacturing process .
Once the production budget has been calculated for a period of one year, it becomes necessary to divide it into shorter periods, which can be measured in quarters, months or weeks , for example, according to the needs of each company regarding the characteristics of the market or markets where it operates.
The importance of stability and foresight
It is interesting to note that, unlike the sales budget, the production budget must be planned in a way that maintains the greatest possible stability throughout the entire manufacturing process , regardless of market conditions . In other words, although a company must forecast sales for each period of the year, realistically accepting ups and downs, when planning production it must seek uniformity.
Regarding the personnel required to participate in the production process, it is important to remember that it is not always possible to have all employees, given certain inconveniences such as health problems and unforeseen resignations . For this reason, it is not advisable to anticipate a work capacity greater than 85%.