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7.6: Sales Budget

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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.

Souvenir Statues

Sales Budget

 

Unit Sales Value

 

Unit Sales Price

 

Total Sales

Metal statues

3,000

x

$200

=

$600,000

Headgear

Sales Budget

 

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.

  1. 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

  2. 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:

             

     Bicycle helmet

    2,640

    0.8

    2,112

       

     Bicycle helmet

    2,640

    0.3

     

    792

     

     Ski helmet

    4,760

    1.6

    7,616

       

     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

  3. 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:

           

     Plastic

    120

    $4

    $480

     

     Lining

    100

    $2

    200

     

     Total beginning inventory

         

    $680

    Direct materials purchases:

           

     Plastic

    9,698

    $4

    $38,792

     

     Lining

    3,688

    $2

    7,376

     

     Total inventory purchase

         

    46,168

    Cost of direct materials available for use

         

    $46,848

    Direct materials inventory, December 31:

           

     Plastic

    90

    $4

    $360

     

     Lining

    140

    $2

    280

     

     Total ending inventory

         

    640

    Cost of direct materials added to production

         

    $46,208

  4. 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

             

     Bicycle helmet (plastic)

    2,640

    0.2

    528

       

     Bicycle helmet (lining)

    2,640

    0.6

     

    1,584

     

     Ski helmet (plastic)

    4,760

    0.4

    1,904

       

     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.

  5. 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.


This page titled 7.6: Sales Budget is shared under a CC BY-SA 4.0 license and was authored, remixed, and/or curated by Christine Jonick (GALILEO Open Learning Materials) via source content that was edited to the style and standards of the LibreTexts platform.

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