How to Prepare the Production Budget
I. Definition of Production Budget
The production budget is a detailed planning of the number of product units to be produced during the coming period, which includes plans regarding the type (quality), quantity (quantity), time (when) the production will be carried out. Production budget means the activity budget, because production is the process of making a product. Production does not need to be budgeted, but it is scheduled.In the narrow sense of the production budget is the amount that must be produced. The amount of goods to be sold will reflect a different approach, namely the production level policy that emphasizes the stability of the production of floating inventories, and if the policy is emphasized at the level of sales, the control of the floating inventory level. The combination of the two will bring up production and inventory will change within a certain time limit.
The production budget is prepared by taking into account all production activities that are needed to support the sales budget that has been prepared. The production plan covers the determination of the products that must be produced to meet planned sales and maintain the desired level of inventory of finished goods.
Production budgets are prior planning and organization of people, materials, machinery, and other equipment and capital needed to produce goods in a certain period in the future according to what is needed or predicted.
II. Use of Production Budget
The production budget is useful for work guidelines, work coordination, and work control of the production division. All levels of managers in the production division must work within a production budget. In addition, the production budget is useful for:o supporting sales activities,
o maintain the level of inventory of finished goods which are at any time requested by consumers,
o controlling production activities in order to create the lowest cost of production.
In general, the production budget is useful as a work guideline, work coordination and work supervision. Whereas specifically the production budget can be useful as.
1) Support sales activities, so products can be provided in accordance with the planned time.
2) Maintain an adequate level of inventory by making an effort that is not too large and not too small.
3) Manage production so that production costs can be reduced to a minimum.
The objectives of the production budget are as follows:
a) To achieve a certain level of profit, for example how many results are produced in order to achieve a profit level with a certain percentage of profit a year against desired sales.
b) To dominate a certain market, so that the results of this company still have a certain market share.
c) To make sure that this factory company works at a certain efficient level.
d) To strive for and maintain that existing jobs and job opportunities can be increasingly developed.
III. Factors that affect the Production Budget
The production budget as calculated based on the sales budget determines the material use budget, material purchase budget, labor wage cost budget or direct labor cost budget, and factory ovehead cost budget. Production planning and scheduling is a factory task which involves determining the amount of goods produced and determining the production time. Therefore the factors influencing the production budget include:o The sales plan contained in the sales budget,
o Factory capacity and plant equipment available including the technology used,
o Workers including recruitment, training, placement, fractionation, and termination of employment,
o Raw materials including transportation and warehousing techniques, and
o Working capital to run the production process
IV. Internal and External Factors in Preparing the Production Budget:
Internal factors are factors within the company that have an influence on the survival of the company:
v Last year's sales' could be the benchmarkv Company policies related to selling prices
v Payment terms for goods sold
v Distribution channel selection
v Workforce owned by the company (Quantitative or Qualitative)
v Working capital owned by the company (Current assets -Current liabilities)
v Facilities owned by the company
v Company policy owned by the company in other fields.
External factors / factors outside the company, but have an influence on the company:
v Competitionv Population growth rate
v The level of community income
v Community education level
v The level of community distribution
v Religion, customs and wisdom of the community
v Government policy
v The state of the recorder
v International and national economic conditions and technological progress.V. Production Budget Compilation
In preparing a production budget that prioritizes the stability of production, it is determined first the needs for 1 year, then estimated the needs every month. Finally, the inventory level is adjusted to the needs, so that production remains stable.
The production budget depends on the sales budget. In a perfectly competitive market condition, the sales budget is the main reference for preparing the production budget, marketing cost budget, administrative cost budget and operating profit budget. Production manager before carrying out activities compile the production budget in the unit and the inventory budget for finished goods in the unit.
A production can run smoothly if the interactions between factors of production are used. If this is done perfectly it will produce good output. With the regulation of the factors of production, the level of effectiveness and efficiency of the production process can be improved, so that the goal of production management can be achieved properly.
The processing of the factors of production should be done based on the opportunities they have, then the opportunities which can be achieved are actually very many opportunities to be implemented, but due to limitations in the factors of production, a procedure must be carried out according to the type of business and activity. which is conducted. "It can be formally stated that the procedure is part of the chronological order and the way it is determined to carry out a job. Chronological order is a characteristic of each procedure, a procedure shows how each task will be carried out and who will carry it out ".
For this reason, the role of production planning procedures in every company is very large, because all tasks performed in the production process must be specified in the plan. In establishing planning procedures, leaders must pay attention to the following stages:
· Setting goals and a set of goals
· Formulate the current state
· Identify all facilities and obstacles
· Develop a plan or set of activities to achieve the goal
Broadly speaking, the production budget is prepared using the general formula as follows:
Sales rate (from sales budget) ......................... XX
Final inventory level ............................................... ........ XX +
Amount ………………………………………… ..................... XX
Initial inventory level ............................................... ......... XX -
Production level ................................................ ................... XX
The production budget is the basis (business) for the preparation of other budgets such as raw material budgets, direct labor budgets and factory overhead costs. So that the relationship between sales levels, inventory levels and levels can be depicted diagrammatically as follows:
VI. Practical Steps for Developing a Production Budget
General steps for preparing a production budget:1. Determine the time period that will be used as the basis for preparing a production budget that is consistent with the period used in preparing the sales budget.
2. Determine the physical unit of goods to be produced
3. Determine standards for the use of resources (raw materials, direct labor and use of facilities.
4. Determine the policy of production patterns and inventory policies.
5. Present the production budget in a table. Presentation in a simple form contains at least information about the time and amount of production. The amount of production is calculated by considering the initial inventory and ending inventory of finished goods. Production = Sales + final supply - initial inventory.
6. For more complex cases the presentation can be adjusted with clear and informative principles
Steps in Implementing the Production Budget
In addition, the main steps that can be taken to prepare the production budget for implementation are:a. The planning stage
1. Determine the time period to be used as the basis for preparing the production section.
2. Determine the number of physical units of goods that must be produced.
b. Implementation phase
1. Determine when the goods are produced.
2. Determine where the goods will be produced
3. Determine the sequence of the production process
4. Determine the standard of using production facilities to achieve efficiency
5. Arranging programs about the use of raw materials, labor, services and equipment.
6. Develop production standards
7. Make improvements when needed.
In the planning stage above, it is said that the determination of the number of physical units of goods that must be produced is adjusted to the sales plan. In general, sales plans are presented in physical units, so calculating the amount of goods to be produced is easy.
Example:
It is expected that 60 units of item A will be in the hands of the company at the beginning of the period. Sales for one period are planned for 100 units. While the final inventory is estimated at 40 units.
So the company must produce goods A as many as 80 units, with the following calculation:
Sales of 100 units
Final inventory of 40 units +
Needs 140 units
Initial inventory of 60 units -
Production of 80 units
Then, at the implementation stage there are steps that determine when the goods will be produced by the company. In determining when an item will be produced, it is first estimated:
· The length of the production process, which is the period of time needed to process raw goods into finished goods.
· The amount of goods to be produced during one period, by looking back at the sales budget.
For companies that have repeatedly produced the same goods, the duration of the production process can be known by remembering past experiences. Whereas for companies that have never produced certain goods so they do not have historical data about the goods, they can conduct research in a simple way in the form of making prototype of goods to be produced.
In determining or estimating the period of production and the amount of goods to be produced, several factors must be considered. These factors include:
a. Factory facilities
Production programs must always be associated with facilities available in the factory and always always consider the efficient use of these facilities.
b. Warehousing facilities
Some types of goods require a special storage system because of its special characteristics. Production that is too far beyond the ability of the warehouse to store it will result in risks, which of course incur costs for the company.
c. Labor stability
Some types of goods have a seasonal nature of demand. Based on the sales budget, in certain months where the volume of sales is expected to be high the company may have to force itself into production. In this case the company can increase its workers or increase the work hours of workers every day. If the labor required as an addition is easy to obtain, there are no problems that can affect the smooth process of production. But if workers are not easy to obtain, it means that the stability of work in the company is disrupted. This can be avoided by making careful production planning and making policies on supplies more regularly.
d. Raw material stability
If the raw materials used are not always available in the market it can endanger the smooth production process. Because of that wisdom in purchasing raw goods is very important to consider.
e. Model used
The size of the working capital available will have an influence on the size of the volume of production and inventory policy. In other words, production policies must be balanced with financial capability.