Page 78 - Budgeting for Managers

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Creating a Production Budget
items, you can still create your own sub-items for the estimates
and then total them when you give the results to accounting.
A Sample Manufacturing Budget
Creating a manufacturing budget is a highly structured process.
We get good results by going through an orderly, step-by-step
process, turning our work plan into a budget. The example in
this section is much simpler than we would find in the real
world, but the principles and practices would apply to more
complex situations.
In our example, the company purchases components (cen-
tral processing units [CPUs], keyboards, and monitors), assem-
bles the computer systems, and ships them for sale. We have
no variations in the product and only one product in the line.
However, we could apply this example to each product we man-
ufacture and combine the results to build our budget.

How Much Will We Produce?
For each product model, we need to ask how many items we’ll
produce in the coming year. Manufacturing plants are expen-
sive, so, in general, we want to make as many as we can, so
we’re manufacturing at the plant’s capacity. However, we also
want to ask if we can sell all that we produce or if we could sell
even more than we can produce. When considering sales vol-
ume in comparison with production volume, we have several
choices:
• If we can sell just about as many as we can produce,
then we don’t change what we’re doing.
• If sales could be considerably higher than capacity, we
might want to increase capacity. We could either expand
our plant with another assembly line or open another
plant. If we do, we should prepare a production budget
for what we’ll manufacture with existing assembly lines,
a project budget for the changes we are making, and a
separate production budget for items made on new