Financial Management: Core Concepts, Third Edition

12.3 Cash Outflow from Production

Because companies typically use sales forecasts for scheduling production, cash expenditures—or disbursements—are also closely tied to these forecasts. Product and service availability is necessary to meet customer needs. Therefore, companies usually base the production schedule on the timing of future sales.

Production costs include, among other items, expenditures for workers’ wages, raw materials for manufacturing products, overhead (such as electricity, water, and plant space), and shipping. For example, Bridge Water Pumps and Filters associates the following production costs with each $2,000 unit: $300 in labor, $500 in materials, $200 in overhead, and $100 in shipping, for a total of $1,100. Again, although ...