Production Budget Formula Definition
The production budget determines the number of products an e-commerce business needs to manufacture during a specified budgetary time period. This is also known as the manufacturing budget. Unlike most other budgets, the production budget is stated in terms of product quantity.
Significance of Production Budget Formula in an E-Commerce Business
The production budget is adjusted based on an e-commerce business’ inventory. Here is its notable significance:
- The production budget formula helps businesses understand their production goals for the next budgetary period.
- It also helps companies to prevent stockouts and losing customers.
Applications of Production Budget Formula
The sales budget is decided before the production budget, as it is a component of the production budget. Companies can use the production budget formula to determine the following aspects:
- The production budget is integral to a business’s operating budget. Companies get to know their expected expenses to manufacture products for sale.
- The production budget formula helps the companies have clear production and sales goals
- The production budget depends on the sales forecast. Hence, it avoids overstocking and turning inventory obsolete.
Production Budget Formula
Production Budget =
Sales Forecast + Ending Inventory (EI) – Beginning Inventory (BI)
Definition of All the Elements in Production Budget Formula
Sales forecast: It refers to the number of products the company has forecasted to sell in the limited budgetary period. The sales forecast is calculated as follows:
Sales forecast = Estimated number of customers x average value of purchase
Ending inventory: It refers to the number of products the company wants to keep in its inventory for the next budgetary period. It will be the beginning inventory the following year.
Beginning inventory: It refers to the items left in the inventory from the previous budgetary period. Whatever was the ending inventory in the previous quarter becomes the beginning inventory in the next one.
How Can You Use the Production Budget Formula to Calculate A Business’s Turnover Ratio
If in a company, the ending inventory is 100 units, the sales forecast demand is 1400 units, and the beginning inventory is 50 units, then the production budget would be:
(100+1400) – 50 = 1450 units
The production budget formula helps businesses calculate their required production amount for different products to maintain cash flow. The production budget is instrumental in helping e-commerce businesses determine cost budgets for labor flow, materials cost and other overhead costs.