Question: The number of units of finished goods to be produced each quarter from the production budget is the starting point for the direct materials purchases budget. However, this is exactly why companies prepare budgets-to plan for the future! It will be difficult for Lynn to plan for this increase in production from the first and second quarters to the third quarter. The third quarter, from July 1 through September 30, is the peak sales season for ice cream. Lynn Young, the production manager, will be concerned about the spike in production during the third quarter of 59,200 units. Examine this figure carefully, particularly the last line labeled units to be produced. Thus actual production will total 40,800 units: 40,800 = 40,000 + 4,800 − 4,000 Units to be produced = Expected sales in units + Desired units of ending inventory − Units in beginning inventoryįigure 9.4 "Production Budget for Jerry’s Ice Cream" presents the production budget for each of the 4 quarters of the coming year. This beginning inventory will be 4,000 units (= 40,000 unit sales in first quarter × 10 percent). However, Jerry’s will not produce 44,800 units because inventory will be left over from the fourth quarter of last year. Units needed for the first quarter total 44,800 (= 40,000 unit sales + 4,800 units desired ending inventory). Thus 4,800 units will be in inventory at the end of the first quarter (= 48,000 unit sales in second quarter × 10 percent). ![]() (We assume beginning and ending work-in-process inventory is zero throughout this chapter.) The management prefers to maintain 10 percent of next quarter’s sales in ending inventory. For the sake of simplicity, assume work-in-process inventory is insignificant, and therefore beginning and ending work-in-process inventory is zero. Jerry’s Ice Cream plans to sell 40,000 units in the first quarter, as shown in Figure 9.3 "Sales Budget for Jerry’s Ice Cream". Key Equation Units to be produced = Expected sales in units + Desired units of ending inventory − Units in beginning inventory The sales budget is presented in Figure 9.3 "Sales Budget for Jerry’s Ice Cream". The average price per unit last year was $6 (1 unit = 1 gallon), and Tom does not expect any change in this price. ![]() Thus, to get projected sales for quarter 1, Tom simply multiplied last year’s first quarter sales by 1.15. His estimate, shown in Figure 9.3 "Sales Budget for Jerry’s Ice Cream", assumes the company will increase sales 15 percent this coming year. Tom Benson, sales manager at Jerry’s Ice Cream, talked with his salespeople and reviewed market trends for ice cream using data obtained from a market research firm. Figure 9.2 "Estimating Sales" shows how companies obtain sales information from sales people, market research consultants, and economists. Smaller, less sophisticated organizations simply base their estimates on past trends. Larger companies sometimes employ economists to develop sophisticated models used to project sales. Many organizations hire market research consultants to obtain and review industry data and ultimately to predict customer demand. ![]() Some companies pay for market trend data to learn about industry and product trends. Companies, such as Jerry’s Ice Cream, typically start with their sales staff since salespeople have daily contact with customers and direct information about customer demand. For example, the production budget and related materials, labor, and overhead budgets are based on expected sales.įorecasting sales often involves extensive research and numerous sources. This is perhaps the most important budget as it drives most of the other budgets. is an estimate of units of product the organization expects to sell times the expected sales price per unit. ![]() What is a sales budget, and how is it prepared?Īnswer: The sales budget An estimate of units of product the organization expects to sell times the expected sales price per unit. Question: The sales budget is the starting point for the master budget, as shown in Figure 9.1 "Master Budget Schedules".
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