Friday, 14 December 2018

Production budget

The production budget calculates the number of units of products that must be manufactured, and is derived from a combination of the sales forecast and the planned amount of finished goods inventory to have on hand (usually as safety stock to cover for unexpected increases in demand). The production budget aims to provide products with established quality. It is divided into two parts: the budget of volume and the production costs.


The objective of the budget is allocation and temporal characterization of the resources necessary for the obtaining of the planned amount of products made with established quality. The result obtained in the production budget is linked with the sales budget and desired stock levels. One can say that the budget is the budget sales.

Before they made the budget to be determined if all the units that have been established in the sales budget can be manufactured. The production is planned with a certain level of efficiency, since if this saw interrupt the production cost would be increased. This budget is divided into two parts:

  • Budget volume.

  • Cost of production budget.

Volume of production budget is used to determine how much and in what time frame products will be taken to so that they are ready for the sales according to the forecast of the same. This budget provides one of the bases of the auxiliary budgets.

Cost of Manufacturing Budget

The cost of production budget includes the allocation of resources to get an item's link with the planned profit and loss account and the budget box. Some auxiliary budgets previously referred and which are necessary to develop a production budget are:

  1. Raw materials budget: focused on stock levels.

  2. Budget of Labor: to ensure that the plan will make it possible to have the number of employees necessary to the moments that are required depending on the production

  3. Maintenance budget: related resources and methods of maintenance and necessary repairs.

  4. Quality control: should be budgeted in the production so this is obtained correctly.

  5. Budget of manufacturing overheads: includes items that make reference to services and consumables and waste disposal.

Different budgets that constitute the production budget appear in the schema of the following figure.

We will give a first definition of the production budget.

The production budget is used for:

  1. Plan what should happen, when and how much.

  2. Review the productive capacity of the factory to meet the planned production or to improve the productive capacity.

  3. Calculate the need for labor.

  4. Calculate the material need.

  5. Establish the cost of production.

  6. Establish the cost of sales.

  7. Performance planned by the difference between the cost of production and cost of sales.

  8. Calculate the financing needs for the costs of production.

Purpose of the production budget.

The production budget is intended to:

  • Establish how much must be produced and at what time.

  • To cope with the expected production.

  • Establish the needs of labor.

  • Establish the needs of materials

The cost of production budget is responsible for:

  • Determine the cost of production and cost of sales to establish the profit and loss account.

  • Calculate the amount of money needed to cope with the costs of production.

Previously it has been said that the main focus of the budget is the of sales; the production budget is part of this for its elaboration. He is obtained in units, and how to perform it is schematic in the following figure.

The realization of this budget involves a series of advantages:

  • The stocks are maintained at a level low, thus avoiding obsolescence.

  • Based on the sales budget, materials need, are established previously with what you can get better prices and that deliveries are made on time.

  • Uniform production means lower costs.

The production budget is equal to the sales budget, expressed in units, plus the final stock less the initial stock.


The company SUEKIN, S.A. intends to sell, in the first quarter of next year, the following units:

A product2,3002,5002,0006,800
Product B3.1003,3003.1009.500

The head of the Purchasing Department sets a final stock of:

A product1,3001.1001,2001,000
Product B1,7001,50016001,500

You are asked to determine the amount that should produce A and B products during the first quarter.

Budget sales
+ final Stock
-initial Stock
budget production
2,300 + 1.100 =
2,300 + 1.100 =



2,300 + 1.100 =



22.300 + 1.100 =




Budget sales
+ final Stock
-initial Stock
budget production
3,100 + 1,500 =
3.300 + 1.600 =



3.100 + 1.800 =



9.500 + 4.900 =




The production budget part of the sales budget expressed in units and takes into account the initial stocks and planned end. Initial stocks of each month are ending stocks from the previous month, i.e., the initial existence of January is the final existence of December; the initial existence of February is the final existence in January, and so on.

Say that, later on, we will publish in this corner a second post in which we will discuss raw material, hand work and expenses budgets. Finally, we can see an interesting video that explains how to make a budget of production with Excel.

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