Page 191 - DMGT403_ACCOUNTING_FOR_MANAGERS

Accounting for Managers

Notes 9.4.1 Classification on the Basis of Functions

On functional basis, the budgets can be classified into following categories:
1. Production Budget
The preparation of the production budget is mainly dependent on the sales budget. The
production budget is a statement of goods, how much should be produced. It may be in
terms of quantities, Kilograms in monetary terms and so on.

Did u know? What is the purpose of the production budget?

The ultimate aim of the production budget is to find out the volume of production to be
made during the year based on the sale volume. The production and sales volume should
go hand-in-hand with each other, otherwise the firm would require to face the acute
problem on holding unnecessary excessive stock or inadequate stock to meet the needs of
the buyers in time; which will disrepute in the supply of goods in time to them as already
agreed upon.
Units to be produced = Budgeted Sales + Closing Stock – Opening Stock

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

Figure 9.4

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.

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