Production Budget

A production budget shows how many units a company needs to produce to meet planned sales while maintaining enough inventory to help avoid stockouts.

Crestline Appliances manufactures blenders.

Managers begin the budgeting process with a sales forecast based on past sales and market trends.

Based on this forecast, the company prepares a sales budget for two thousand eight hundred blenders for the upcoming quarter.

John, the production manager, then uses the sales budget to decide how many blenders the company must produce.

To help prevent stockouts at the end of the quarter and support the company's inventory strategy, he sets the desired ending inventory at twenty percent of expected sales. This equals five hundred sixty units.

John records these details on the production budget by adding expected sales and the desired ending inventory.

The company begins the quarter with five hundred fifty units in inventory. John subtracts this amount from the total units needed to complete the calculation.

This results in a required production of two thousand eight hundred ten units.

In this way, the production budget helps the company maintain steady inventory, coordinate operations, and control costs.