Sales, Production, and Purchases Budgets Managerial Accounting Prepared by Diane Tanner University of North Florida Chapter 38

2 Master Budget  A comprehensive planning document  Incorporates a number of individual budgets Sales budget Production budget Materials purchases budget Direct labor budget Manufacturing overhead budget Selling and administrative budget Capital acquisitions budget Cash budget Sales budget Production budget Materials purchases budget Direct labor budget Manufacturing overhead budget Selling and administrative budget Capital acquisitions budget Cash budget Budgeted statement of cash flows Budgeted income statement Budgeted balance sheet Budgeted statement of cash flows Budgeted income statement Budgeted balance sheet Replaced by an ‘inventory purchases’ budget for merchandising companies, or by ‘cost of services’ budget for service companies

The Flow of Budgets in the Master Budget Production Budget Selling and Administrative Budget Materials Purchases Budget Manufacturing Overhead Budget Direct Labor Budget Cash Budget Sales Budget Budgeted Financial Statements 3

Sales Budget  First step in the budget process  Why?  Subsequent budgets cannot be prepared without an estimate of sales  Involves forecasting sales  Based on various methods including  Econometric models  Previous sales trends  Trade journals and magazines  Sales force estimates 4

Sales Budget Example  DartCo’s selling price is $10 per bucket for April with a 5% increase per month thereafter.  Budgeted sales for the next five months are:  April 3,200 units  May 4,000 units  Then 10% increase per month thereafter 5 AprilMayJune Budgeted sales (units) 3,200 4,000 4,400 Selling price per unit $10.00$10.50$11.03 Total sales $32,000$42,000$48,510  While this budget covers 3 months, management often prepares annual, quarterly, and monthly budgets

Production Budget 6 Sales Budget Production Budget The only budget in the master budget that is prepared in ‘units’ Budgeted sales of finished units + Desired ending inventory of finished units − Beginning inventory of finished units = Finished goods units to be produced

Production Budget Example 7 Trump Inc. produces trinkets. Each trinket requires 0.4 board feet of wood and 1.25 hours of direct labor. Wood costs $1.40 per board foot. Trump desires to have 20% of the materials needed for production during the next month on hand at the end of each month, and 15% of the number of trinkets to be sold the next month on hand at the end of each month. Scheduled sales of trinkets for April are 4,200, May is 4,500, and June is 5,200 units. Prepare a production budget for May. Begin with units to be sold Trinkets to be sold4,500 Add ending FG inventory desired: 15% x 5,200 Add ending FG inventory desired: 15% x 5,200 Ending FG inventory desired780 Subtract beginning FG inventory desired: 15% x 4,500 Subtract beginning FG inventory desired: 15% x 4,500 Beginning FG inventory to be on hand(675) Budgeted trinkets to be produced4,605 Add the ending and subtract beginning inventories

Direct Materials Purchases Budget Step 1: Begin with units to be sold Step 2: Convert to the RM denomination, i.e., in what quantities are materials purchased from suppliers Such as…pounds, yards, kilograms, linear feet Step 3: Multiply to determine the quantity needed for production Step 4: Add desired ending RM inventory Step 5: Subtract expected beginning RM inventory Step 6: Multiply the materials quantity to be purchased times the cost per unit of material Step 1: Begin with units to be sold Step 2: Convert to the RM denomination, i.e., in what quantities are materials purchased from suppliers Such as…pounds, yards, kilograms, linear feet Step 3: Multiply to determine the quantity needed for production Step 4: Add desired ending RM inventory Step 5: Subtract expected beginning RM inventory Step 6: Multiply the materials quantity to be purchased times the cost per unit of material 8

Materials Purchases Budget Format 9 Budgeted finished units to be produced x Raw materials needed for each finished goods unit = Total raw materials units needed for production + Desired raw materials ending inventory − Beginning raw materials on hand = Raw materials needed to purchase x Cost per raw materials unit = Budgeted cost of purchases Denominated in ‘units’ in which the raw materials are inventoried.

Materials Purchases Budget Example 10 Trump Inc. produces trinkets. Each trinket requires 0.4 board feet of wood, costing $1.40 per board foot. Trump desires to have 20% of the materials needed for production during the next month on hand at the end of each month, and 15% of the number of trinkets to be sold the next month on hand at the end of each month. Scheduled production of trinkets for May is 4,605 and June is 5,100 units. Prepare a materials purchases budget for May. Begin with FG units to be produced Trinkets to be produced4,605 Add ending RM inventory desired: 20% x 5,100 x 0.4 feet Add ending RM inventory desired: 20% x 5,100 x 0.4 feet Ending RM inventory desired408 Subtract beginning RM inventory desired: 20% x 4,605 x 0.4 feet Subtract beginning RM inventory desired: 20% x 4,605 x 0.4 feet Beginning FG inventory to be on hand(368) Convert to RM denomination Wood (board feet) required for each trinket 0.40 Multiply to get total needed for production Board feet of wood needed for production1,842 Continued

Materials Purchases Budget Example 11 Each trinket requires 0.4 board feet of wood, costing $1.40 per board foot. Trump desires to have 20% of the materials needed for production during the next month on hand at the end of each month, and 15% of the number of trinkets to be sold the next month on hand at the end of each month. Scheduled production of trinkets for May is 4,605 and June is 5,100 units. Prepare a materials purchases budget for May. Budgeted board feet to purchase6,487 Add the ending and subtract beginning inventories Indicate the cost per RM denomination Cost per board foot $ 1.40 Multiply to determine the cost of materials purchases Budgeted cost of materials purchases $9,082

Hints  Must clearly distinguish between the two types of inventory in budgets  Companies produce and sell finished goods So….  Sales budget uses only units to be sold  The production budget determines finished units to be produced  Materials purchases budget units are denominated in raw materials units; it ultimately determines the raw materials units to be purchased 12

13 The End