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9.23: Sales Forecast and the Master Budget

  • Page ID
    45913
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    Learning Outcomes

    • Summarize the impact of the sales forecast on the master budget

    It is December again, and you know your supervisor is going to start asking you to work on the annual budget. It is such a pain to try to accumulate all of the numbers he is requesting, and you don’t understand why he is so picky about the whole process. Begrudgingly you begin putting together the seemingly endless spreadsheets, and accounting documents he is asking for, but why? How can what feels like a waste of time be so important to the company?

    The master budget will offer guidance to every department in the company, knowing, starting at the sales forecast, where product needs to be priced, how to manage floor space and staff each step of the process. It can be hard to see the benefit of this large process, if you only work in one department of a company, so let’s take a look, from the first step forward.

    The master budget contains multiple components, so let’s take a look at each one of them individually first, then we will start putting the pieces together.

    What would you, as a manager, think is the most important number to know, before you start any budgeting process?

    If you answered sales, you are right! We can’t do anything from a budgeting standpoint until we have the sales forecast as a beginning number. We are going to call this forecast, the sales budget, and it is the first piece of a somewhat large puzzle.

    Having accurate sales figures is the key to the entire budgeting process. If this budget is inaccurate, it kind of rolls downhill and the rest of the budgets will be off as well. In big companies, there might be mathematical models and statistics involved in figuring out these numbers. Don’t worry. We won’t be doing that in this course, but knowing the importance of this information is the key.

    This budget will affect the variable portions of the selling and administrative budgets and will also feed into the production budget. The production budget is needed to figure out direct materials, direct labor and manufacturing overhead budgets. Once these are all done, then comes the finished goods inventory budget.

    Once all of these budgets are done, we can do a cash budget, income statement and balance sheet to finish off the process. Information from all of the previous budgets go into creating the cash budget, so you can see the importance of an effective and accurate sales budget!

    So let’s get started with our Sales Budget! Our company, Hupana Running Company makes the best running shoe ever. They have tasked you with creating a sales budget for the shoe. Let’s start with some basic assumptions, so we can start to build a budget.

    Hupana plans to sell 2,000 pairs of shoes this year. The selling price of the shoes is $100 per pair. For simplicity, we are going to assume that all of the sales are cash sales, and that sales is even each quarter.

    So armed with that information, here is the sales budget for Hupana Running Company!

    All 4 Quarters Q1 Q2 Q3 Q4
    Budgeted sales in pairs 2000 500 500 500 500
    Selling price per pair $100 $100 $100 $100 $100
    Sales in $ $200,000 $50,000 $50,000 $50,000 $50,000

    What is next? On to the production budget!


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