Production Budget: Preparation & Examples Video

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  • 0:02 What Is a Prod Budget?
  • 0:29 How to Prepare Prod Budget
  • 1:12 Where Do the Numbers…
  • 1:37 Prod Budgets Gone Wrong
  • 2:03 Prod Budget Example
  • 2:36 Lesson Summary
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Lesson Transcript
Instructor: Kevin Newton

Kevin has edited encyclopedias, taught middle and high school history, and has a master's degree in Islamic law.

Every time a company creates a sales budget, a production budget can't be too far behind. In this lesson, we look at the importance of the production budget and why it is always the second budget created.

What Is a Production Budget?

A production budget is unique in that it doesn't have any currency listed on it. Instead, it is a guide as to how much a company must produce to meet its sales goals. As such, it is one of the most important budgets that a company will produce and is second only to the sales budget in being done for a given quarter. In this lesson, learn about creating a production budget, where the numbers come from, and what happens when someone gets it all wrong.

How to Prepare a Production Budget

To prepare a production budget, we get the number of goods that the company expects to sell in a given period. Often, the same period is used that is defined in the sales budget. That means you'll often prepare a production budget every quarter - possibly every month. With those numbers, add the number of units that the company wants to have in inventory at the end of the period. This gives the total production required.

Then, subtract any units the company already has in inventory. Remember, inventory means completed but not yet sold to customers. That gives the net number of units that need to be produced that quarter. Also note that a production budget, like a sales budget, will often be prepared for each different good or group of similar goods that a company sells.

Where Do the Numbers Come From?

As you are probably thinking, before a company starts making the production budget they have to know where all those numbers come from. The most important number, the number of goods that we expect to sell, comes straight from the sales budget. Then use an inventory report to get the number of goods still in inventory. Also, base the desired final inventory off of the desires of the company. Everything else can be deduced from those numbers.

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