Page 192 - DMGT403_ACCOUNTING_FOR_MANAGERS

Unit 9: Budgetary Control

Why it is not possible at always? Notes

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 9.5

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.
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, 2008 for a
factory manufacturing four different articles on the basis of the following information:
Type of the Product Estimated Stock on Jan 1, Estimated sales Desired Closing
2008 Units during Jan-Mar, 2008 Stock on Mar 31,
Units 2008 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

LOVELY PROFESSIONAL UNIVERSITY 187