A production budget is a quantity budget which lays down the quantity of units to be produced during the budget period. The main purpose of this budget is to maintain an optimum balance between sales, production and inventory position of the firm. It is also known as output budget because it depicts the quantitative estimates of output for the budget period as well as also the estimates at different control period within the budget period.
The quantity of output to be manufactured during budget period may be expressed either in terms of number of articles, weight or standard hours. Where standard products are manufactured, they must be expressed in terms of number of units. For non-standard products weight must be used.
Objectives and Importance of Production Budget
The objectives s of the preparation of a production budget are as follows –
(1) To consider all the relevant factors affecting the sales and other operational activities of the organization.
(2) To make provision for raw materials at right time and place.
(3) To plan the sequence of operations necessary for economical production.
(4) To co-ordinate the various aspects of factory production operations in order to maximize the profits of the firm.
Importance of Production Budget in Managerial Planning:
The importance of production budget in the budgetary process is quite obvious. It occupies an ‘in between position’ between the sale budget and inventory budget. It contributes a lot in the co- ordination of plans and policies concerning sales, production and inventory.It brings co-ordination between sales budget, inventory balance and production capacity of the enterprise.
Often sales department is aggressive in putting forth the demand for variety of products or new products. On the other hand at the same time, there might also be management policy of maintaining inventory at high levels. But if the production department is unable to meet the demand of sales and stock people, obviously the targets of sales budget and inventory budget cannot be obtained.
In fact, an useful plan of sales and inventory balances programmes can be achieved only after taking into consideration the production position.
A production budget is very helpful in stabilizing production which leads to many direct and indirect economies. Such economies may be in the purchase of raw materials, planned utilization of plan capacity, intensive use of capital and stability in employment.
Production budget helps in the physical control of raw material, work-in-progress and finished goods stock.
Thus, we can say that it helps in the realization on the major financial objective of the enterprise, the profit maximization.
