Once you know what you are going to sell, the next step is to determine what needs to be produced. For a manufacturing company the total finished goods units to be produced is calculated as follows:
Budget Production = Budget Sales (in units) =
+ Target ending finished goods inventory (in units)
– Beginning finished goods inventory (in units)
So let us say you predicted sales of 200, 000 units and you currently have 100, 000 units in stock (your beginning finished goods inventory) and you will like to have 20,000 in stock at the end of the budget period. You will need to produce: 200,000 + 20, 000 – 100,000 = 120,000.
Next step to be discussed: Preparing the Direct Material Usage Budget and Direct Material Purchase Budget.