Page 148 - DMGT202_COST_AND_MANAGEMENT_ACCOUNTING

Unit 8: Budgetary Control

Units to be produced = Budgeted Sales + Closing Stock – Opening Stock Notes
The methodology of production budget includes three different components, viz. sales, closing
stock and opening stock. Sales has to be added with the stock of the year at the end and to be
deducted the opening stock.
Why sales has to be given paramount importance in the preparation of production budget?

The major sales of the business enterprise is being regularly made out of only through the current
year production.
Why the closing stock has to be added?
The purpose of the closing stock to be added is that it is a stock at end of the year-end out of the
current year production.
Why the opening stock has to be deducted?
The aim of deducting the opening stock is that the stock at the beginning is the stock out of the
yester or previous year production.

If sales is normally equivalent to the entire year of production, the firm need not to concentrate
on the volume of opening stock and closing stock. It means that, what ever produced during the
year is equivalent to current year sales. If the entire production is sold out, there won’t be closing
stock at the end of the year and opening stock i.e. subsequent years.
If Current year production is equivalent to current year sales

Current year production Current year sales
=
Internal environment Demand and Supply

Resultant: No closing stock and opening stock for the subsequent years. This situation may not
be possible at always
Why it is not possible at always?
The production volume is connected to the internal environment of the firm, which can be

maintained through a systematic approach, but the sales cannot be easily administered by the

firm which is being highly influenced by the demand and supply factors of the goods.
If the current year production is not equivalent to the current year sales
Figure 8.3: Flow of goods from Production of one Period to Another

Opening Stock Current year sales Closing Stock

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

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.

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