Production budgets: Production budget is the projection of units that must be produced to meet anticipated sales. It is in two parts – one part contains the volume of production and the other part shows the cost of production. A production cost budget shows the budgeted costs for direct material, direct labor, and manufacturing overhead. It is normally prepared for a “push” manufacturing system, as is used in a material requirements planning environment. It is typically presented in either a monthly or quarterly format.
The basic calculation used by the production budget is:
+ Forecasted unit sales
+ Planned finished goods ending inventory balance
= Total production required
– Beginning finished goods inventory
= Products to be manufactured
Production cost budget is a plan that shows the predicted cost for direct materials, direct labor, and overhead costs to be incurred in manufacturing units in the production budget. Managers use the production budget to estimate how many units they will need to produce in future periods based on the future estimated sales numbers.