Production budget

Definition

A production budget estimates the number of units that must be produced to meet sales goals and maintain desired inventory levels. It is a crucial component of the master budget, helping firms plan their manufacturing activities.

5 Must Know Facts For Your Next Test

1. The production budget is derived from the sales budget.
2. It includes calculations for beginning inventory, desired ending inventory, and required production.
3. A key objective is to ensure there are enough units to satisfy customer demand without overproducing.
4. Material, labor, and overhead budgets are often based on the figures in the production budget.
5. It plays a vital role in cash flow management by forecasting future production costs.

Review Questions

• How does the production budget relate to the sales budget?
• What components are necessary to calculate the total units to be produced in a period?
• Why is it important for companies to create an accurate production budget?

Related terms

Sales Budget:

A financial plan that estimates future sales revenue and sets sales targets for a specific period.

Master Budget:

A comprehensive financial planning document that includes all individual budgets related to sales, production, expenses, and other aspects of business operations.

Inventory Management:

The process of ordering, storing, using, and selling a company's inventory, including raw materials, components, and finished products.