Budgets for a Manufacturing Business

Written by True Tamplin, BSc, CEPF®

Reviewed by Subject Matter Experts

Updated on March 30, 2023

Manufacturing businesses are typically more complex than businesses that just buy and sell. In the manufacturing industry, there is a broad range of possible budgets that an organization can use to build-up the master budget and cash budget.

Budgets need to be based on the same set of assumptions about the way that the organization operates. They are typically organized around estimates of the key budget factor, which is usually the sales forecast.

Budgets for a Manufacturing Business

The typical budgets are:

Sales Budget

The sales budget is usually generated directly from the key factor forecast data.

Production Budget

The production budget is based on the sales budget together with expected stock levels of finished materials.

Materials Usage Budget

This budget is based on the production budget.

Materials Purchases Budget

This budget is based on the materials usage budget, together with the anticipated materials stock levels.

Labour Utilization Budget

This budget is based on the production budget.

Various Functional Budgets

These budgets are prepared to support the operations of the manufacturing business. Examples of functional budgets include the administration budget and finance budget.

Capital Expenditure Budget

A capital expenditure budget must be developed in conjunction with the above revenue budgets to ensure that the agreed spending on new or replacement equipment, along with other expenditures, is in place.

Cash Budget

The cash budget takes account of the data in the above budgets.

The effect of all the revenue and capital budgets is finally consolidated into the master budget. This takes the form of a budgeted profit and loss account and balance sheet for the whole manufacturing business.

A Note on Stock Levels

You will have noticed several references in the above list of budgets for a manufacturing business to stock levels.

Where stock levels are to remain constant, the situation is simple. For example, the production budget will be identical to the sales budget if the finished goods stock level is to remain unchanged.

However, if the stock level is to increase, then the extra units of goods that will go into stock will need to be produced in addition to the units that are to be sold immediately. This is a concept that is important throughout budgeting, including cash budget preparation.

Integration of Budgets in a Manufacturing Business

The diagram below shows how the main budgets used in a manufacturing business fit together. It also illustrates how various pieces of data are used in a cash budget.

This diagram, for the sake of clarity, concentrates on issues that are specific to the creation of a cash budget for a manufacturing business. Other data (e.g., disbursements, capital items, and financing) also need to be accounted for in the cash budget.

Integration of Budgets in a Manufacturing Business

Budgets for a Manufacturing Business FAQs

About the Author

True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website or view his author profiles on Amazon, Nasdaq and Forbes.