7.6: Sales Budget
The sales budget is prepared first by estimating the number of units that will be sold. This analysis looks at budgeted and actual sales from the previous year and adjusts those amounts to reflect economic conditions, shifts in trends, feedback from customers, and pricing changes.
In addition, the expected unit selling price for each product must be determined by examining previous pricing and profitability, current costs, the market demand for the products, and competitors’ pricing.
The sales budgets for the two companies’ products are as follows.
|
Unit Sales Value |
Unit Sales Price |
Total Sales |
|||
|
Metal statues |
3,000 |
x |
$200 |
= |
$600,000 |
|
Unit Sales Value |
Unit Sales Price |
Total Sales |
|||
|
Bicycle helmet |
2,600 |
x |
$50 |
= |
$130,000 |
|
Ski helmet |
4,800 |
x |
130 |
= |
624,000 |
|
Total sales revenue |
$754,000 |
The budgeted sales in dollars equals the expected sales volume times the expected selling price per unit for each product. The sum of all products’ sales is ultimately transferred to the budgeted income statement.
Cost of goods sold is the next line item on the income statement. Five shorter, more targeted budgets are first prepared to arrive at key elements of the cost of goods sold budget.
-
The
production budget
estimates the number of units of each product that will have to be manufactured to achieve the anticipated sales and inventory levels. It begins with the estimated number of units to be sold from the sales budget. The number of desired units in ending inventory is added to that to determine total number of units required. Since some of those needed are already in stock, those do not need to be produced. The total units that do need to be produced are those needed for sales and ending inventory minus those that are already in inventory at the start of the period.
The production budgets for the two companies’ products are as follows.
Souvenir Statues Production Budget
Units
Estimated units to be sold
3,000
Desired ending inventory, December 31
+
600
Total units needed
=
3,600
Estimated beginning inventory, January 1
-
2,600
Total units to be produced
=
1,000
Headgear Production Budget
Production Budget
Bicycle
Ski
Estimated units to be sold
2,600
4,800
Desired ending inventory, December 31
+
150
+
280
Total units needed
=
2,750
=
5,080
Estimated beginning inventory, January 1
-
110
-
320
Total units to be produced
=
2,640
=
4,760
-
The
direct materials purchases budget
estimates how much will be spent to buy the quantity of materials needed for production. It begins with the total number of units to be manufactured from the production budget.Each statue requires 8.6 pounds of metal, so the total number of pounds for production can be calculated. Each helmet requires both plastic and foam lining, and the total amount needed for production is determined for each type. The number of pounds that should remain in ending inventory is added to total pounds needed for production. Then, the number of pounds of materials in beginning inventory is deducted from total required since that amount is already in stock and does not need to be purchased. The number of pounds that does need to be purchased is multiplied by the cost per pound to get the total cost of materials purchases.
The direct materials purchases budgets for the two companies’ products are as follows.
Souvenir Statues Direct Materials Purchases Budget
Estimated units to be produced
1,000
Number of pounds per unit
x
8.6
Pounds of metal required for production
=
8,600
Desired ending inventory, December 31
+
300
Total pounds needed
=
8,900
Estimated beginning inventory, January 1
-
1,800
Total pounds to be purchased
=
7,100
Price per pound
x
$6
Total direct materials to be purchased
=
$42,600
Headgear Direct Materials Purchases Budget
Units
Lbs. per unit
Plastic
Lining
Total
Units required for production:
\(\ \quad \quad\)Bicycle helmet
2,640
0.8
2,112
\(\ \quad \quad\)Bicycle helmet
2,640
0.3
792
\(\ \quad \quad\)Ski helmet
4,760
1.6
7,616
\(\ \quad \quad\)Ski helmet
4,760
0.6
2,856
Desired ending inventory, December 31
90
140
Total pounds needed
9,818
3,788
Estimated beginning inventory, January 1
120
100
Total pounds to be purchased
9,698
3,668
Price per pound
$4
$2
Total direct materials to be purchased
$38,792
$7,376
$46,168
-
The
direct materials cost budget
looks at the total cost of materials available to be used in production by adding what was already on hand at the beginning of the year to what will be purchased during the year, taken from the direct materials purchases budget. From that total the remaining direct materials at the end of the year are deducted, since they were not used, to arrive at the cost of direct materials added to production during the year.
The direct materials cost budget can be presented in a summarized format, as shown for the souvenir statues, or with a greater level of detail, as is the case for the helmets, which require two types of materials rather than just one. The direct materials cost budgets for the two companies’ products are as follows.
Souvenir Statues Direct Materials Cost Budget
Direct materials inventory, January 1
$10,800
Direct materials purchases
+
42,600
Cost of direct materials available for use
=
53,400
Direct materials inventory, December 31
-
1,800
Cost of direct materials added to production
=
$51,600
Headgear Direct Materials Cost Budget
Pounds
Price per lb
Subtotal
Total
Direct materials inventory, January 1:
\(\ \quad \quad\)Plastic
120
$4
$480
\(\ \quad \quad\)Lining
100
$2
200
\(\ \quad \quad\quad \quad\)Total beginning inventory
$680
Direct materials purchases:
\(\ \quad \quad\)Plastic
9,698
$4
$38,792
\(\ \quad \quad\)Lining
3,688
$2
7,376
\(\ \quad \quad\quad \quad\)Total inventory purchase
46,168
Cost of direct materials available for use
$46,848
Direct materials inventory, December 31:
\(\ \quad \quad\)Plastic
90
$4
$360
\(\ \quad \quad\)Lining
140
$2
280
\(\ \quad \quad\quad \quad\)Total ending inventory
640
Cost of direct materials added to production
$46,208
-
The
direct labor cost budget
estimates the second direct cost of a manufactured product, direct labor. It multiplies the number of units to be produced, taken from the production budget, by the number of hours per unit. That result is then multiplied by the labor rate per hour.
The direct labor cost budgets for the two companies’ products are as follows.
Souvenir Statues Direct Labor Cost Budget
Total units to be produced
1,000
Production time per unit
x
5
Hours required for production
=
5,000
Labor rate per hour
x
$10
Total direct labor cost
=
$50,000
Headgear Direct Labor Cost Budget
Units
Hours/Unit
Plastic
Lining
Total
Units required for production
\(\ \quad \quad\)Bicycle helmet (plastic)
2,640
0.2
528
\(\ \quad \quad\)Bicycle helmet (lining)
2,640
0.6
1,584
\(\ \quad \quad\)Ski helmet (plastic)
4,760
0.4
1,904
\(\ \quad \quad\)Ski helmet (lining)
4,760
1.2
5,712
Total hours needed
2,432
7,296
Rate per hour
$15
$12
Total direct labor cost
$36,480
$87,552
$124,032
The direct labor cost budget for the helmets is a bit more detailed since it deals with two products that each require two different direct materials.
-
The
factory overhead cost budget
estimates each of a number of fixed costs independently. The total of all the results is the budgeted factory overhead cost. The factory overhead cost budgets for both companies follow.
Souvenir Statues Factory Overhead Cost Budget
Supervisor salary
7,600
Utilities
+
1,900
Indirect materials
+
1,700
Depreciation
+
800
Total factory overhead cost
= $12,000 Headgear Factory Overhead Cost Budget
Indirect factory wages
$59,900
Depreciation
+
8,700
Utilities
+
2,800
Insurance
+
1,600
Total factory overhead cost = $73,000
The five previous targeted budgets provide the information required for the cost of goods sold budget .