 The production budget is based on data from the sales budget. We need to know what the demand for our products will be before we know how many we're going to produce. You can see that the production budget is the second budget completed in the master budget process. In the simplest format, units to be produced would just equal our sales volume. But a more common format would be to factor beginning and ending inventory into the calculations. Companies don't want to end the month with zero items in inventory because they wouldn't have anything to sell on the first day of the next month. So the production budget is sales volume plus desired ending inventory, and that equals the production needs. From that, we subtract the beginning inventory to arrive at the units needed to be produced. So let's assume that 10% of the next quarter's sales needs to be on hand at the end of the quarter. So the desired ending inventory is 10% of the next quarter's sales and added to the current quarter's sales volume to arrive at production needs. Of course, ending inventory from one quarter becomes the beginning inventory in the next quarter. So we subtract that from production needs to arrive at the units needed to be produced. So let's look to see how to do this in Excel. Notice the column letters and the row numbers. We will reference this as we build this budget in Excel. Here we have both the sales budget and the production budget. We start by linking the two budgets together. I can't emphasize how important this is. Once the budgets are built, we might want to change sales volume and do a little what-if scenario analysis. What a pain it would be if we had to go into every budget and make changes. So when budgets are linked together, the analysis is a snap. So here I've linked the sales and the production budget to the sales volume in the sales budget. Then the desired ending inventory can be a formula based on next quarter sales volume. Beginning inventory can be a sell linked to the prior month's ending inventory. And finally, some of the numbers I've just assumed because I want to keep the examples straightforward.