Question

1. Why should the production requirements set forth in the production budget be carefully coordinated with the sales budget?

2. Why should the timing of direct materials purchases be closely coordinated with the production budget?

Answer 1

Production requirements set forth in the production budget be carefully co ordinated with the sales budget because, the goods which are produced should be sold without any holding of finished goods, that is when the production is more than what is demanded in the market it may lead to increase of inventory holding costs, similarly when the production is less than what is demanded in the market, then it may lead to loss of sales and profit margin to the company, therefore production and sales budget should be closely compared to each other during the budget preparation.

Direct materials purchases should be in sync with production budget because, direct material should be more than what is required and always should be available for production without any stock out situation, the 1st will lead to increase in inventory carrying cost, and the later in delay of production. Following JIT system would be recommended in the both cases. Therefore direct materials purchases should be closely coordinated with the production budget.