2. Production Budget

The second step in budgeting was develop a production budget and a raw materials schedule for the first quarter of the coming year. Since there was no established policy on production scheduling, inventory planning, or raw materials inventory, it was necessary to establish one. Edison, Robert, and Alice agreed that a policy based on experience would have to wait until some data were collected over the next 6 to 8 months. In an effort to "get things going," they settled on a two-part operational statement of policy:

1. Production in any month should be scheduled so that an ending inventory of Darn Good will equal one-half of the next month's expected sales.
2. Purchase of raw material should be made so that on average there is enough raw material on hand to produce 700 Darn Goods. Thus, no end-of-month inventory should have fewer than 700 units of raw material.

Prepare a production schedule, schedule of raw material use, and a schedule of raw material purchases for January, February and March. Finally, prepare a schedule of expected cash disbursements for raw materials. Raw materials are always purchased on a 30-day-due basis. Consequently, payments are always made in the month following the purchase of materials. It is expected that 1,700 units of materials will be purchase during the December prior to the coming year.