# Production Budget Formula

## 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

## Inference

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.