1. Introduction and Objectives
The budgeting process begins with the Sales Budget, which serves as the core driver for all subsequent operational schedules. This lesson covers how to project sales revenue and structure production schedules to maintain optimal inventory targets.
 
2. The Sales Budget Schedule
The sales budget estimates revenue based on expected volume and planned selling prices:

Budgeted Sales Revenue = Projected Sales Volume (Units) × Planned Unit Selling Price
 
3. The Production Budget Inventory Model
Once sales volumes are established, the production budget determines how many units must be manufactured to support sales while maintaining safe finished goods buffers.
  • Standard Formula:
    Required Production Units = Budgeted Sales Volume (Units) + Target Ending Finished Goods Inventory − Opening Finished Goods Inventory

4. Computational Scenario
A distribution company projects sales of 10,000 units in Quarter 1 and 12,000 units in Quarter 2. The company’s policy is to maintain ending finished goods inventory at exactly 20% of the next quarter’s budgeted sales volume. The opening inventory for Quarter 1 is 2,000 units.
python
sales_q1 = 10000
sales_q2 = 12000
inventory_policy_pct = 0.20
opening_inv_q1 = 2000

# Calculate target ending inventory for Quarter 1
target_ending_q1 = sales_q2 * inventory_policy_pct

# Calculate required production units for Quarter 1
required_production_q1 = sales_q1 + target_ending_q1 - opening_inv_q1

print(f"Target Ending Inventory (Q1): {target_ending_q1:.0f} units")
print(f"Required Production Units (Q1): {required_production_q1:.0f} units")
 
Evaluating these formulas confirms:

  • Target Ending Inventory (Q1) = 12,000 × 0.20 = 2,400 units.

    Required Production Units (Q1) = 10,000 + 2,400 − 2,000 = 10,400 units.

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