Page 80 - Budgeting for Managers

Creating a Production Budget
to sell in January of the following year. We want to make sure
we have an ending inventory enough to support sales for that
additional month. We remember that, at the beginning of this
year, there weren’t enough computers to go out the door in
January and we don’t want that to happen again. They tell us 63
they expect to sell 10,000 units the January after next, so we
plug that in as our desired ending inventory of finished goods.
Next, we go to the production manager and ask her how
many computers will be left in our warehouse at the end of this
year. She tells us there will be 5,000. That’s our ending invento-
ry for this year, which is also our beginning inventory of finished
goods for next year.
We put all of this together in Table 4-1 and we see that we
want to produce 55,000 computers.
Inventory Management
Before we go on to calculate the cost of producing 55,000 com-
puters, let’s take a brief look at inventory management. This is
only the briefest introduction to the topic. Inventory manage-
ment includes counting and accounting for items we have in
storage. The items can be parts to be assembled, raw materials,
partially assembled components, or finished goods.
Inventory is the quantity of items we have on hand. We
always have two figures, the number in our accounting books
(book inventory) and the actual number in the warehouse (physi-
cal inventory). To ensure accuracy in our accounting, we take
inventory: we count the items in the warehouse. Taking inventory
is time-consuming and costly, so we try to keep our accounts
accurate by tracking the items that come into the warehouse and
the items that go out. Taking inventory may reveal a dis-
crepancy due to accounting
errors, poor tracking of Direct materials Parts and compo-
items, or theft. We need to nents that go into our finished goods.
Direct materials are variable cost
adjust our books and
items, because they vary according to
explain the discrepancy.
how much we produce.
There are three basic