# Sequence of Preparation: Sales → Production → Purchase

Functional budgets are prepared in a strict sequence because each budget feeds into the next.

## 1. Sales Budget (First)

The Sales Budget is prepared first as it determines the number of units the company plans to sell, is capable of selling, or expects to sell. All other budgets flow from it.

## 2. Production Budget (Second)

Prepared on the basis of the Sales Budget. It determines the number of units to be produced to meet sales requirements after adjusting for inventory.

### Formula — Units to be Produced

```

Opening Stock of FG + Units Produced − Closing Stock of FG = Sales

=> Units to be Produced = Sales + Closing Stock of FG − Opening Stock of FG

```

## 3. Purchase Budget (Third)

Prepared based on the Production Budget. It determines the quantity of raw material to be purchased to meet production requirements after adjusting for RM inventory.

### Formula — Units to be Purchased

```

Opening Stock of RM + Units Purchased − Closing Stock of RM = Units Consumed in Production

=> Units to be Purchased = Consumption + Closing Stock of RM − Opening Stock of RM

```

## Important Cues from the Question

1. If the pattern of production or consumption is given → the unknown to calculate is purchases.

2. If the question asks to maintain a specific level of closing stock → the unknown to calculate is production (or purchases, depending on context).

Worked example

### Example 1

Production Budget Example:

Budgeted sales = 50,000 units. Opening FG stock = 5,000 units. Desired closing FG stock = 7,000 units.

Units to be produced = 50,000 + 7,000 − 5,000 = 52,000 units.

### Example 2

Purchase Budget Example:

Units to be produced = 52,000. RM required per unit = 2 kg. Opening RM stock = 8,000 kg. Desired closing RM stock = 10,000 kg.

Consumption = 52,000 × 2 = 1,04,000 kg.
Purchases = 1,04,000 + 10,000 − 8,000 = 1,06,000 kg.

⚠️ Common exam mistakes

Adding opening stock and subtracting closing stock (sign reversal) in the production / purchase formula.
Starting from the Production Budget instead of the Sales Budget — production cannot be planned without knowing demand.
Confusing RM stock with FG stock when applying the formula.
Computing purchases directly from sales without going through production — units consumed in production ≠ units sold when WIP/FG inventory changes.

Reference:

Now that you've read this — what's next?

Move from understanding → mastery in 3 clicks. Each option below picks up from this lesson's topic.

🔥 Drill 5 Qs on this → ✍️ Adaptive practice →

Sequence of Functional Budgets — Sales, Production & Purchase

Worked example

⚠️ Common exam mistakes