Definition: A production budget is a financial plan that lists the number of units to be manufactured during a period. In other words, this is a report that estimates the number of units that a plant will produce from period to period.
What Does Production Budget Mean?
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. They also use this report as a planning tool for future production processes, machine times, and scheduling. Production managers have to estimate the future demands and plan out the workflow to make sure everything is produced timely and there aren’t long periods of wait time or down time.
This is the main reason why the production budget does not show the costs of production nor the sales revenue from the estimated sales during the period. Instead, it always shows the total estimated sales in units and the budgeted number of units produced. Remember, this is a report used to determine the number of units that need to be produced during the period. The sales budget and manufacturing budget are used to estimate the total revenues and expenses for the period.
The standard production budget compares three periods of activity. These periods could be years, months, or even weeks depending on what the managers need to forecast their plans. The report uses a simple equation to calculate the units to be produced during the period.
First, it takes the next period’s budgeted sales units and multiplies them by the ratio of inventory to future sales. This gives us the budgeted ending inventory in units. We can then add the budgeted sales units for the current period and subtract out the beginning inventory leaving the number of units that will need to be produced based on the estimated sales numbers and desired ending inventory balance.