Production budget

Lamar Bristol plc is a large trading organisation with retail premises in most major towns and cities in the UK. The key budget factor is sales; the company’s main board sets the sales budget by agreeing an annual fixed percentage increment which is applied to all stores. The increment varies from year to year and is dependent upon the directors’ assessment of current economic conditions and competitors’ published sales figures. Generally it varies between 2% and 4%.

Discuss the likely effectiveness and efficiency of this method of setting a sales budget, identifying strengths and weaknesses of the approach.

Pirozhki Products uses a rolling budget system. The company’s directors are currently preparing a sales and production budget for the month of March 2009, which is just over one year away. They have decided that sales of their single product should be budgeted at 12 000 units for March 2009, with 14 800 units budgeted for April 2009. The company’s policy is to hold closing inventory of finished goods at 75% of the next following month’s sales level.

What is the production budget in units for March 2009?

a) 8 100

b) 14 100

c) 9 900

d) 12 000.

Solution: