Management Accounting · Budget preparation

How to Prepare Sales and Production Budgets

Updated 11 October 2026 · Fact-checked

A sales budget forecasts the units you expect to sell and the sales revenue (units × price). The production budget then shows how many units to make: budgeted sales + closing finished goods inventory − opening finished goods inventory. Work in units first, then apply costs or prices.

Understand Sales and Production Budgets

A budget is a plan in numbers. Most budgets start from the principal budget factor, the thing that limits the business. Usually this is sales demand, so the sales budget comes first.

The sales budget states how many units you expect to sell in each period and at what price. Multiply units by selling price to get sales revenue. Every other budget depends on this one.

The production budget says how many units the factory must make. You cannot just copy the sales figure. A business holds finished goods inventory. If you start with units already in store, you need to make fewer. If you want units left in store at the end, you must make more.

Think of it as a store cupboard. Units out of the cupboard = sales. Units into the cupboard = production. The cupboard starts at opening inventory and ends at closing inventory. So production = sales + closing inventory − opening inventory.

The production budget is in units, not money. It feeds the materials usage, labour and overhead budgets. Get it wrong and every later budget is wrong too.

Key formulas to remember

Sales revenue: Sales revenue = budgeted sales units × selling price per unit; If the price changes during the year, calculate each period separately.
Production budget (units): Production = Sales + Closing finished goods − Opening finished goods; Works in units. This is the core formula for this topic.
Opening inventory link: Opening inventory of a period = Closing inventory of the previous period; Use this to find opening figures for later periods.
Closing inventory as a policy: Closing inventory = stated % × next period's budgeted sales; Common wording: 'inventory equal to 20% of next month's sales'.
Production with wastage: Units to start = good output required ÷ (1 − wastage % of input); Only if the question states a loss on production. Check whether the loss is a % of input or of good output.

How to solve Sales and Production Budgets questions

Use the same layout for any question. Do the sums in units first, period by period.

1Read the question and note the periods (months, quarters or a year) and whether figures are units or money.
2Write the budgeted sales units for each period. Multiply by price if sales revenue is asked.
3Find the closing finished goods inventory for each period. If it is a % of next period's sales, you need the next period's sales figure, so look ahead.
4Set opening inventory for each period. The first period's opening is given. After that, it equals the previous closing.
5Lay out a small table with rows: sales, add closing inventory, less opening inventory, production.
6Calculate production in units for each period.
7Adjust for any production wastage or loss if the question states one.
8Check the answer: total production should equal total sales plus the change in inventory over the whole period.

Quickest way: The cupboard check in one line per period

When to use it: Use this for number entry or multiple choice questions where you need one period's production figure fast.

Write: Sales + Closing − Opening = Production.
Plug in the three numbers. Do not draw a full table for a single period.
If closing is a % of next month's sales, calculate that % first.
Sense check: if closing is higher than opening, production must be higher than sales. If lower, production is lower than sales.
If a loss is stated, divide by the yield factor last.

Common mistakes in Sales and Production Budgets

Adding opening inventory and subtracting closing inventory.
Students reverse the formula or confuse it with the cost of goods sold calculation, where opening is added.
Fix: Think of the cupboard. Higher closing inventory means you must make more. So add closing, subtract opening.
Using this month's sales to work out closing inventory when the policy refers to next month's sales.
The wording is skimmed and the look-ahead is missed.
Fix: Underline 'next month' in the question. Write out sales for one extra period before you start.
Forgetting that opening inventory equals the previous period's closing inventory.
Students treat each period in isolation and reuse the first period's opening figure.
Fix: Fill in the opening row by copying across from the previous closing figure, one column to the right.
Putting money values in the production budget.
Students multiply by price out of habit after calculating sales revenue.
Fix: The production budget is in units. Apply a price only for the sales budget, and a cost only in cost budgets.
Ignoring production wastage, or applying the percentage the wrong way.
A 10% loss is subtracted from the required output instead of dividing by 90%.
Fix: If 10% of input is lost, good output is 90% of input. Divide required good units by 0.9.
Valuing the units sold at the production cost in the sales budget.
Mixing up cost and selling price.
Fix: Sales revenue always uses the selling price per unit.

Worked examples

Example 1

A company expects to sell 4,000 units in January, 5,000 in February and 6,000 in March at $12 per unit. Opening finished goods at 1 January are 800 units. The policy is to hold closing inventory equal to 20% of the next month's sales. April sales are expected to be 5,500 units. Prepare the sales revenue and production budget (units) for January to March.

Show the solution

Sales revenue: January 4,000 × $12 = $48,000. February 5,000 × $12 = $60,000. March 6,000 × $12 = $72,000.
Closing inventory: January = 20% × 5,000 = 1,000 units. February = 20% × 6,000 = 1,200 units. March = 20% × 5,500 = 1,100 units.
Opening inventory: January 800 (given). February 1,000. March 1,200.
January production = 4,000 + 1,000 − 800 = 4,200 units.
February production = 5,000 + 1,200 − 1,000 = 5,200 units.
March production = 6,000 + 1,100 − 1,200 = 5,900 units.
Check: total production 4,200 + 5,200 + 5,900 = 15,300. Total sales 15,000 + (1,100 − 800) = 15,300. Correct.

Answer: Sales revenue: $48,000, $60,000 and $72,000. Production: 4,200, 5,200 and 5,900 units.

Example 2

A business budgets to sell 9,000 units in a quarter. Opening finished goods are 1,500 units and closing finished goods are to be 1,200 units. Production suffers a 10% loss of units started (a loss of 10% of input). How many units must be started in production?

Show the solution

Good units required: 9,000 + 1,200 − 1,500 = 8,700 units.
Good output is 90% of input because 10% of input is lost.
Units to start = 8,700 ÷ 0.9 = 9,666.67.
Round up to whole units: 9,667 units.
Check: 9,667 × 0.9 = 8,700.3, which covers the 8,700 needed.

Answer: About 9,667 units must be started (8,700 good units needed).

Exam tips

In objective test questions, the trap answer is usually the result of reversing the signs. Work out which way the answer should move before you calculate.
Read whether the figure asked for is units or money. Production budgets are in units.
If inventory is stated as a percentage of next period's sales, check for the extra period's sales figure, often tucked in at the end of the question.
For number entry, follow the rounding instruction given. Do not round part-way through a calculation.
Section B questions on budgeting often reuse the production budget to build later budgets. Keep your table tidy so you can reuse it for materials and labour.

Practice questions from Budget preparation

Sales and Production Budgets in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Sales and Production Budgets: frequently asked questions

What is the formula for a production budget?

Production units = budgeted sales units + closing finished goods inventory − opening finished goods inventory. It works in units. If a loss on production is stated, adjust the result for it.

Why does closing inventory get added in the production budget?

Closing inventory is stock you want left over, so you must produce it on top of what you sell. Opening inventory is already made, so it reduces the amount you need to produce.

Do I start with the sales budget or the production budget?

Start with the sales budget when sales demand is the principal budget factor, which is the usual case. The production budget depends on it. If another factor limits the business, such as materials or labour, that budget is prepared first.

Is the production budget in units or in money?

It is in units. The money values arrive later in the materials, labour and overhead budgets, which use the production units.