Production budget

Financiers often want to see a breakdown of how you ll spend the money you re asking them to provide. They re also likely to want to see your entire production budget, to get a sense of how funds will be allocated overall. 

It also aims to make aU necessary arrangements so that the production targets as set in the production budget and master schedules are reached. While attaining these targets, adjustments are made for the fluctuations in the demand. 

Product innovation absorbs considerable resources in the fine chemicals industry, in part because of the shorter life cycles of fine chemicals as compared to commodities. Consequently, research and development (R D) plays an important role. The main task of R D in fine chemicals is scaling-up lab processes, as described, eg, in the ORAC data bank or as provided by the customers, so that the processes can be transferred to pilot plants (see Pilot PLANTS AND microplants) and subsequently to industrial-scale production. Thus the R D department of a fine chemicals manufacturer typically is divided into a laboratory or process research section and a development section, the latter absorbing the Hon s share of the R D budget, which typically accounts for 5 to 10% of sales. Support functions include the analytical services, engineering, maintenance, and Hbrary. 

Table 10 itemizes the specific four-digit Standard Industrial Classification (SIC) industries considered to be secondary timber products manufacturers. For more information on the SIC system, see Executive Office of the President, Office of Management and Budget (119). 

The basic objectives of budgets are planning and control. The first step is to determine the hmiting factor. For example, budgeted sales cannot exceed the maximum productive capacity of the available plant. Since all the activities in the plan are interrelated, the extent of the plan is determined by the limiting factor. 

Standard Costs for Budgetary Control For convenience and simplicity, we shall consider the total cost of a manufac tured product to be the sum of the material, labor, and overhead costs. Standard costs are those that have been predetermined and budgeted for the manufacture of a given amount of product in a given time. The deviation of the actual cost from the standard cost is called the variance. It is far easier to make comparisons between periods by using variances than by using actual production data. The different variances for materi, labor, and overhead costs are listed in Table 9-38. 

Static and Flexible Budgets Overhead cost can significantly affect the profitability of a projec t and is the only cost outside the control of the project manager. The project is expected to contribute a definite amount toward the expenses of the company and will be charged this amount even if the production rate is zero. This is the fixecTcomponent of the overhead cost and will include directly allocable costs such as depreciation and a proportion of general costs such as office salaries and heating. 

Two types of overhead budget are currently in use. The static (often referred to as the fixed) budgeted overhead cost is related to the standard budgeted production rate. The flexible budgeted overhead cost is that shown as the total cost in Table 9-39. Values for intermediate production rates are often obtained by interpolation. This is justifiable only when semivariable costs are a negligibfe part of overhead costs. 

Flexible budgeting is more widely used than static budgeting despite certain logic difficulties. This is so because production in many cases is seasonal and the use of a static production norm might distort evaluation of performance. Variances are the difference between the actual costs expended and the budgeted costs expec ted. Variances are unfavorable if positive and favorable if negative. Any variance should be explained and, if necessaiy, controlled the largest variance should be considered first. 

Let us consider the overhead-cost data for Table 9-39 with 10 million kg per month as the standard production rate. The static budgeted overhead is then 150,000 per month, or 1.5 cents per kilogram. We assume that the actual overhead is 186,000 for a month in which 12 milhon kg was produced. Then, the static budgeted overhead cost would be 12 million(I.5), or 180,000 per month. Therefore, the variance is 186,000 — 180,000 = -t- 6000, which is unfavorable because 6000 more was spent than was anticipated. 

From Table 9-39 we find that the flexible budgeted overhead cost for a produc tion rate of 12 million kg per month is 190,000. The corresponding variance is 186,000 minus 190,000, or — 4,000, which is favorable Because 4,000 less was spent than was anticipated. Thus, the use of flexible budgeting makes this particular performance look better without changing either the production rate or a single cost of the planned budget. 

Also in Eq. (9-224), Cboh E simply the flexible budgeted overhead cost in dollars per hour for the actual production rate, and the overhead-volume variance 0(cboh oh) is the actual time taken to produce a given output multiplied by the difference between the flexible budgeted overhead cost and the standard overhead cost in dollars per hour. The budgeted overhead-cost variance (Cqh — 0Cboh) is the difference between the actual overhead cost and the actual time (in hours) required to produce the given output multiphed by the flexible budgeted overhead cost (in dollars per hour). 

For production rates that differ from the agreed normal rate, the flexible budgeted overhead cost is given by... 

For production rates lower than normal, the fixed overheads are underused, and the flexible budgeted overhead cost Cboh is greater than the standard overhead cost c°iqh. For production rates higher than normal, Cboh is less than c°iqh. 

Equipment—client may not have the equipment required to manufacture a specific product. It may be that available capital and installation time are limited such that they simply can not design, acquire, install and test the process equipment to reach the desired capacity within the available budget and time. If a product is in the early stages of its life cycle, the capital required may be hard to justify. This could be based upon the low initial volume anticipated while developing the market or the need to take advantage of a time-sensitive business opportunity. Tolling can provide a means to safely produce introductoiy, short-term, or small volume products that would otherwise be uneconomic. 

The way many companies identify resource requirements is to solicit resource budgets from each department covering a 1 to 5 year period. However, before the managers can prepare budgets they need to know what requirements they will have to meet. They will need access to the corporate plans, sales forecasts, new product development plans, marketing plans, production plans, etc. as well as the quality policies, objectives, and procedures. 

Produce and agree resource budgets for management, productive work, and verification activities. 

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