Question

The production budget cannot be prepared until the direct materials and the direct labor budgets are...

The production budget cannot be prepared until the direct materials and the direct labor budgets are prepared.

True or False?

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Answer #1

Answer: False

Production budget should be prepared first in order to see the number of units to be produced; and then the input budgets (direct material budget and direct labor budget) should be prepared. This is required for understanding the required match.

Example: Suppose a production budget gives information of expected production 5,000 units. Direct material requires 2 units for each production unit at $3 per unit and direct labor requires 0.5 hours per production unit at $4 per hour. Therefore,

Direct material budget = (5,000 × 2) × $3 = $30,000

Direct labor budget = (5,000 × 0.5) × $4 = $10,000

If there was no production budget, there will be non-availability of production units which doesn’t make sense of preparing those direct material budget and direct labor budget.

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