All subjects · Accounting · WAC12 Corporate and Management Accounting

Revenue, production, purchases and inventory budgets

Edexcel IAL Accounting · WAC12 Corporate and Management Accounting

Functional budgets turn the sales forecast into plans for production, raw materials and inventory. Each one follows a simple formula, and errors in one carry through to the next.

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Revenue and production

Revenue budget = budgeted units x budgeted selling price.

Production budget (units) = budgeted sales + closing inventory of finished goods - opening inventory of finished goods.

Closing inventory is often a percentage of the next month's sales, and one month's closing inventory is the next month's opening inventory.

Purchases and inventory

Materials usage = production units x material per unit.

Purchases budget (quantity) = usage + closing raw material inventory - opening raw material inventory; multiply by the price for the value.

Inventory budget: opening + purchases (or production) - issues (or sales) = closing, in units or value.

Examiners note that blank rows earn nothing even when the label is given: complete every line.

UnitsJanFebMar
Sales1,0001,2001,500
Add closing inventory (20% of next month's sales)240300280
Less opening inventory(200)(240)(300)
Production1,0401,2601,480

Production budget (April sales 1,400 units)

Working backwards

Questions sometimes give a figure after a mark-up or discount. If cost plus 25% = £400, cost = 400 x 100/125 = £320, not 400 - 25% = £300. The June 2025 examiners reported this error when candidates worked back from a 25% increase.

Worked example

Each unit needs 3 kg of material at £5 per kg. Closing raw material inventory is 25% of next month's usage; opening January inventory is 780 kg. Using the production budget, prepare the purchases budget for January and February.

  1. Usage: Jan 1,040 x 3 = 3,120 kg; Feb 1,260 x 3 = 3,780 kg; Mar 1,480 x 3 = 4,440 kg
  2. Jan purchases = 3,120 + 945 - 780 = 3,285 kg = £16,425
  3. Feb purchases = 3,780 + 1,110 - 945 = 3,945 kg = £19,725

Answer: January £16,425; February £19,725

Key idea: Production = sales + closing inventory - opening inventory; purchases = usage + closing materials - opening materials; revenue = units x price; work backwards from mark-ups with 100/(100 + mark-up).

Check yourself

  1. A company plans to sell 2,400 units at £35 and 2,800 units at £33 in a quarter. Calculate budgeted revenue.
    Show answer

    £176400. 84,000 + 92,400 = £176,400.

  2. Budgeted sales are 5,000 units. Opening inventory is 600 units and closing inventory is planned at 800 units. Calculate budgeted production.
    Show answer

    5200 units. 5,000 + 800 - 600 = 5,200 units.

  3. Production needs 9,000 kg of material. Opening material inventory is 1,500 kg and closing is planned at 1,200 kg. Material costs £4 per kg. Calculate the purchases budget in £.
    Show answer

    £34800. (9,000 + 1,200 - 1,500) = 8,700 kg x £4 = £34,800.

  4. Opening inventory is 450 units. Production is 2,100 units and sales are 2,300 units. Calculate closing inventory.
    Show answer

    250 units. 450 + 2,100 - 2,300 = 250 units.

  5. Goods are sold at cost plus 25%. A sale is worth £6,500. What did the goods cost?
    Show answer

    £5200. 6,500 x 100/125 = £5,200.

  6. Closing inventory each month is 10% of the next month's sales. Sales are 3,000 units in May and 3,600 in June. Opening May inventory is 300 units. Calculate May production.
    Show answer

    3060 units. 3,000 + 360 - 300 = 3,060 units.

  7. Which budget must be prepared before the materials purchases budget?
    • Cash budget
    • Budgeted statement of financial position
    • Production budget
    • Trade payables budget
    Show answer

    Production budget. Materials usage depends on production.

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Last updated 8 November 2026. Spotted a mistake? Tell us.