Page 138 - DCOM302_MANAGEMENT_ACCOUNTING

Unit 7: Budgeting

Figure 7.2: Flow of goods from Production of One Period to Another Notes

Opening Stock Current year sales Closing Stock

Yester year production (units) Current year production (units)

Did u know? Why the closing stock arises in the business?
The closing stock is stock due to the excessive production over the sales volume. The
reasons for excessive production are as follows:

1. Ineffective study of market potential through market research leads to the expression
of excessive demand from the market, which signals the production department to
produce to the tune of MR conducted.

2. Due to price fluctuations in the market may affect the volume of sales.
3. Due to meet the future demand.
4. The excessive production due to the cheaper availability of raw materials, which
leads to greater amount of closing stock. If the storage cost is more than the hike
takes place on the cost of raw materials leads to abnormal storage of the stock.
The above diagram clearly illustrates that the emergence of the opening stock and closing stock
during the year out of sales and production volume of the enterprise.

Example: Prepare a production budget for three months ending March 31, 2006 for a
factory manufacturing four different articles on the basis of the following information:
Type of the Product Estimated Stock on Jan Estimated sales during Desired Closing Stock
1, 2006 Units Jan-Mar, 2006 Units on Mar 31, 2006 Units
AA 2000 10,000 5,000
BB 3000 15,000 4,000
CC 4000 13,000 3,000
DD 5000 12,000 2,000
Solution:
Production Budget for three months ending March 31, 2006

Particulars AA BB CC DD
Units Units Units Units
Estimated Sales 10,000 15,000 13,000 12,000
Add: Desired closing stock 5,000 4,000 3,000 2,000
15,000 19,000 16,000 14,000
Less: Opening Stock 2,000 3,000 4,000 5,000
Estimated Production 13,000 16,000 12,000 9,000

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