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Prepared by Diane Tanner University of North Florida

Chapter 38. Sales, Production, and Purchases Budgets. Prepared by Diane Tanner University of North Florida. A comprehensive planning document Incorporates a number of individual budgets. Master Budget. Operating Budgets. Sales Production Materials purchases Direct labor

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Prepared by Diane Tanner University of North Florida

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  1. Chapter 38 Sales, Production, and Purchases Budgets Prepared by Diane Tanner University of North Florida

  2. A comprehensive planning document Incorporates a number of individual budgets Master Budget Operating Budgets Sales Production Materials purchases Direct labor Manufacturing overhead Selling and administrative Capital acquisitions Cash budget Financial Budgets Statement of cash flows Budgeted income statement Budgeted balance sheet 2

  3. The Master Budget 3 Sales Budget Selling and Administrative Budget Production Budget Materials Purchases Budget Manufacturing Overhead Budget Direct Labor Budget Cash Budget Budgeted Financial Statements

  4. 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 Sales Budget 4

  5. Sales Budget Example 5 • GoodBuy’s selling price is $10 per CD 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

  6. Finished units to be produced = Expected sales in units + Desired ending inventory of finished units – Beginning inventory of finished units Production Budget 6 The only operating budget in ‘units’

  7. Production Budget Example 7 March 31 = 20,000*20% April 30 = 50,000*20% GoodBuy’s wants ending inventory to be equal to 20% of the following month’s budgeted sales in units.

  8. The Production Budget 8 June ending inventory = 20%*July sales = 20*25,000 = 5,000

  9. Step 1: Convert to the RM denomination, i.e., how are materials maintained…pounds, 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 Direct Materials Purchases Budget 9

  10. Materials Purchases Budget Example 10 March 31 = 10%*130,000 10% of the following month’s production From production budget At GoodBuy’s , 5 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 month’s production. July’s sales are budgeted at 23,000 units. Material cost is $0.40 per pound.

  11. Materials Purchases Budget Example 23,000*5*10%

  12. Key Points 12 • Clearly distinguish between the two types of inventory in budgets • Companies produce and sell finished goods So…. • Sales budget uses only units to be sold • Production budget converts units to be sold into units to be produced • Materials purchases budget converts units to be produced to materials needed for production 12

  13. The End

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