From the course: Accounting Foundations: Budgeting

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Master budget exercise: The production budget

Master budget exercise: The production budget

From the course: Accounting Foundations: Budgeting

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Master budget exercise: The production budget

- After the sales budget is completed, the second detailed budget covers the number of units to be produced during the period. Now, there are three factors that need to be considered in preparing this production budget. First, the projected sales volume for the period. Second, the desired ending inventory. How much do you want on hand at the end? And, third, the amount of inventory already on hand in the beginning inventory. Now, ending inventory is an important figure because management wants enough units on hand to meet customer demands, but not so many that unnecessary costs will be incurred because of excessive inventory. So let's consider the question, why does a manufacturer want any inventory at all? Well, on the one side, what if we run out of finished goods? We'll have lost sales, perhaps now and forever. We'll also have lost reputation. But on the other hand, what if we have too many finished goods? Well, we'll have excess resources tied up in inventory. The inventory could…

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