The production budget

- After the sales budget is completed,…the second detailed budget covers the number…of units to be produced during the period.…Three factors need to be considered…in preparing this production budget.…First, the projected sales volume for the period.…Second, the desired amount of ending inventory.…And third, the amount of inventory already on hand…in the beginning inventory.…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 ending inventory?"…On 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?…We'll have excess resources tied up in inventory.…The inventory could get old and obsolete,…eventually having to be sold at a loss.…And where do we store all these extra fishing boats?…