Chapter 38 Sales, PRoduction,

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Chapter 38
Sales, Production, and Purchases Budgets
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Master Budget

• A comprehensive planning document
• Incorporates a number of individual budgets

Operating Budgets

• sales
• production
• materials purchases
• direct labor
• manufacturing overhead
• selling and administrative
• capital acquisitions

Financial Budgets

• Statement of cash flows
• (cash budget)
• budgeted income statement
• budget balance sheet

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The Master Budget
Budgeted Financial Statements
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Sales Budget

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

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Sales Budget Example

• The selling price is 10 per unit for April with
  a 5 increase per month thereafter.
• Budgeted sales for the next five months are
• April 2,000 units
• May 4,000 units
• Then 10 increase per month thereafter

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Production Budget

• The only operating budget in units
• Finished units to be produced
• Expected sales in units
• Desired ending inventory of finished units
• Beginning inventory of finished units

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Production Budget Example
DT, Inc. wants ending inventory to be equal to
20 of the following months budgeted sales in
units.
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The Production Budget
June ending inventory 20July sales
2025,000 5,000.
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Direct Material Purchases Budget

• Step 1 Convert to the RM denomination, i.e.,
  how are materials maintainedpounds, yards, etc.
• Step 2 Determine pounds needed for production
  and for ending RM inventory. Subtract beginning
  RM inventory.
• Step 3 Factor in the cost per RM unit.(pounds,
  yards, etc.)
• Required purchases of direct materials Amount
  required for production
• Desired raw materials ending inventory
• Beginning inventory of raw materials

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Direct Materials Purchases Budget Example
At DT, Inc., five pounds of material are required
per unit of product. Management wants materials
on hand at the end of each month equal to 10 of
the following months production. Julys sales
are budgeted at 23,000 units. Material cost is
0.40 per pound.
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Direct Materials Purchases Budget Example
23,000510
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Key Points

• Clearly separate the two types of inventory in
  these budgets RM and FG
• We produce and sell FG (not RM).
• The matching concept applies. i.e., we use
  materials for units to be produced, not units to
  be sold.

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