The production budget is a fundamental part of the overall budget of a company. Without the production budget it is practically impossible for a commercial or industrial organization to carry out its objectives.
An effective and efficient production budget will allow the leaders of a company to know what is being manufactured and if the results achieved match those expected . The nature and characteristics of the production budget will be explained below. Image: LittlePigPower || Shutterstock
What is a production budget?
The production budget is closely linked to the sales budget because without it it would be impossible to know how much a company is going to try to sell in a given period.
The production budget refers to the process of creating or manufacturing articles by a company in the budgeted period and under specific conditions.
The production budget converts sales volume into manufacturing units . With it it is possible to calculate the necessary costs to achieve the desired sales and the planned benefits. Indicates the number of units that the company must produce in a specific period to achieve the budgeted sales.
Characteristics of the production budget
To carry out an effective production budget, a company must take into account a number of factors :
- The staff available to create the product;
- The sought profit margin ;
- The time necessary to carry out production (working hours).
- The hourly value.
There is a general formula for carrying out the production budget . This is Production budget (units) = sales budget + planned ending inventory-opening inventory.
The managers of elaborating the production budget in a company are the production managers , who have to manage both the work done by the employees and the materials necessary to make the previously developed planning a reality. Production managers are also routinely in charge of inventory control and warehouse management.
The production budget, in turn, should include several elements: material budgets, company purchases , labor, manufacturing costs , and the company’s operating costs .
The materials budget refers to the raw material that will be necessary to carry out production. To obtain this raw material it will be necessary to buy it, the cost of which is analyzed by the purchasing budget. This type of budget must also inform about the dates when the raw materials must be delivered.
Regarding the labor budget , they are the necessary workers to execute the planned production. The manager must also take into account the distribution of personnel in the different stages of production.
On the other hand, the manufacturing cost budget must include both indirect and direct costs, which are charged to the cost of the product. Indirect expenses are those that cannot be directly attributed to the costs of a merchandise since they correspond to the production process of various products or to different departments.
Finally, the production cost budget is the expenses attributable to the entire process.
Benefits of a good production budget
A good production budget can have many benefits for the company if it is executed properly, taking into account the factors that will intervene when executing internal processes:
- It fundamentally helps to meet the proposed general objectives , provided they are measurable and quantifiable;
- Reduces unnecessary production expenses;
- Take better advantage of workers’ skills and experience;
- Helps to manage inventories more intelligently and accurately;
- Attract more skilled labor;
- Achieve greater efficiency throughout the process.
- Promote job stability.
Get to know all the types of budgets for companies that you can find that will allow you to manage your business correctly.
The production budget exemplifies the cost of carrying out the operations plan or production plan that allows us to develop the production process of our company. Therefore, it is convenient to know all the information about the operations plan to elaborate an effective productive strategy in our company. In addition, you can get an example of a production budget to budget your activity in the next period.