Which two budgets must precede the creation of the materials cost budget in a production company?

Which two budgets must precede the creation of the materials cost budget in a production company?

• A. Sales and production
• B. Cash and capital expenditures
• C. Labor and overhead budgets
• D. Marketing and R&D budgets

Answer: (A)

In manufacturing, the materials purchases plan is built from the production plan, which in turn is driven by the sales forecast. The number of units you plan to produce determines how much material you’ll need, and that production plan comes from the sales budget. So you need both a sales budget (to forecast demand) and a production budget (to translate that demand into units to manufacture) before you can accurately prepare the materials cost budget. The other budgets—cash and capital expenditures, or labor and overhead, or marketing and R&D—don’t establish the production quantities needed to drive material purchases, even though they relate to costs or strategy.

In manufacturing, the materials purchases plan is built from the production plan, which in turn is driven by the sales forecast. The number of units you plan to produce determines how much material you’ll need, and that production plan comes from the sales budget. So you need both a sales budget (to forecast demand) and a production budget (to translate that demand into units to manufacture) before you can accurately prepare the materials cost budget. The other budgets—cash and capital expenditures, or labor and overhead, or marketing and R&D—don’t establish the production quantities needed to drive material purchases, even though they relate to costs or strategy.