CMA Exam Study Notes: The Production Budget

The Production Budget of an enterprise is based on its sales budget. Typically, the production budget is in line with the capacity and inventory needs of the enterprise.

Production Plans and Inventory Levels

When an enterprise receives a huge order unexpectedly, it will need to boost its inventory level to deliver the finished goods in time. Here, when the enterprise desires to boost its inventory level, it will have to make the necessary modifications in its production plans.

Likewise, when the level of finished goods is high, if the enterprise desires to reduce its inventory level, it will manufacture lesser number of units than it intends to sell.

The Production Budget of an enterprise should accurately determine the number of units it plans to produce.

The Importance of Timing the Production of Goods

The production budget includes a specific schedule of production of goods. For example, if the anticipated sales are higher in the initial months of the year, production needs to be high during the same period to meet the anticipated sales demand.

Likewise, if higher sales are foreseen during the second half of the year, production of goods need to be timed to match anticipated sales.

Raw Materials Price Fluctuation

Fluctuation in the price of raw materials is another important factor to be taken into consideration in timing the production of goods.

Purchasing raw materials at lower prices is undoubtedly more profitable. Hence, this is also a huge factor in determining when an enterprise produces its finished goods.

Budgets of Different Departments

The budgets of different departments in an organization are intricately interrelated. A slight change in the budget of one department can inevitably affect the budget of one or more other departments either positively or negatively.

The Role of the Production Budget

The production budget forms the basis for the development of several other budgets of an enterprise.

They include the Direct Labor Budget, Factory Overhead Budget, and Direct Materials Budget.

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