For manufacturing companies production budget is prepared prior to sales budget. Production budget shows the quantities to be produced for achieving sales targets and keeping sufficient inventories. A production budget is stated in physical units.
Budgeted production volume = Budget sales units + Closing Inventory - Opening stock
OR,
Budgeted sales volume + desired closing inventory - opening inventory
Thus production is based on budgeted sales volume and desired inventory level. The responsibility for the preparation and operation of production budget lies with production manager.
Preparation Of Production Budget
Following steps are followed while preparing production budget:
1. Limiting factor(s) both in sales budget as well as production budget should be considered and overcome. If production itself happen to be limiting factor, effort should be made either to increase the budgeted production or to revise the sales budget itself.
2. Inventory policy is also to be taken into account. Production budget should be such as to cover sales units and adjusted inventory units. Where the sales is governing factor and expected sales for present is not enough, it may decide to produce up to capacity, or above the present requirements for inventory accumulation, for reduction of cost or for meeting the additional sales requirements. On the other hand, it may also be decided to scale down the present stock level of certain products and divert the plant capacity for the production of other products.
3. By analyzing the production scheduling any bottleneck in the production process should be found. Keeping into account this bottleneck, production estimate be revised downward or a decision to extend the capacity of that stage may be taken up.
4. If various products are manufactured, production estimates should be expressed in standard hours and not in units.
Key factors which usually control the quantity that can be manufactured are:
* Raw material Supply
* Labor Supply
* Plant Capacity
* Storage Capacity
Management adopts various measures to minimize the incidence of key factors. Following are the some of such measures:
* Working overtime - Shift working
* Using alternative raw materials
* Out-souring of finished products or components
* Re-designing of product to reduce the production bottleneck
* Improved plant lay out
* Installation of balancing facilities to even out the imbalances
* Installation of additional and/or improved plant
* Training of workers
* Introduction of incentive schemes
* Method improvements
The stock of work-in-progress should be expressed in equivalent finished goods terms and then should be treated as inventory.
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