A production budget is an estimate of the costs associated with producing something, ranging from a film to a line of products. Before the actual production process can proceed, accountants must sit down and develop a production budget, creating targets to meet at various stages during the process to keep costs under control and meet consumer demands. This process requires information like expected revenues, orders, and inventory requirements, all of which must be provided so the production budget will be as accurate as possible.
In the case of consumer products, companies look at how many products they have on hand and how many they expect to sell to develop a production budget, determining how many products they need to make to keep up with demand. This can include allowances for increasing advertising and outreach with the goal of making more sales. The budget will show how much production costs will involve over the course of the year and can identify areas of potential savings, such as running a large batch in the first quarter to meet the needs of the first and second quarters, allowing the company to use the plant for other things.
In film making, the production budget is split into so-called above-the-line and below-the-line costs. The imaginary line divides creative talent from technical requirements. Directors, starring actors, screenwriters, and other creative members of the team are all part of the budget above the line. Technical crew, expenses for equipment and location rentals, and so forth fall below the line. The film company may have a set amount of money available, and the production budget shows how a film will use it and stay within the overall budget.
During the production process, accounting is necessary to track revenues and expenses. Accountants periodically check their numbers against the production budget to see if they are meeting targets. Unexpected expenses can throw a budget off balance and create the need for adjustment or allocation of more funds to finish the production in a timely fashion. Specific areas of overspending may be targeted for cutting and requests to bring costs down with the goal of keeping the overall budget within the desired limits.
A production budget can apply to projects large and small. It creates guidelines for production costs to make it easier to control costs and determine whether companies are meeting stated spending goals. Since substantial outlays of funds may be necessary before any profits roll in, controlling those outlays is critical to keep the company functional until it starts to make money.