Key Takeaways
- The sales budget is the starting point for the master budget because all other budgets derive from expected sales volume.
- Sales forecasting methods include qualitative approaches (sales force composite, market research) and quantitative methods (trend analysis, regression).
- The production budget ensures sufficient inventory to meet sales while maintaining target ending inventory levels.
- Direct materials, direct labor, and manufacturing overhead budgets flow from the production budget and are essential for cost planning.
- The production budget formula: Required Production = Budgeted Sales + Desired Ending Inventory - Beginning Inventory.
Sales and Production Budgets
Quick Answer: The sales budget is the cornerstone of the master budget—all other budgets flow from it. Production budgets determine how many units to manufacture based on sales forecasts and inventory targets. Direct materials, direct labor, and manufacturing overhead budgets then quantify the resources needed to achieve production goals.
The Sales Budget
The sales budget is the starting point for the entire master budget process. Its accuracy directly impacts all downstream budgets.
Sales Budget Formula
Budgeted Sales Revenue = Expected Sales Units × Selling Price per Unit
Sales Budget Components
| Component | Description |
|---|---|
| Unit Sales Forecast | Expected quantity to be sold by product, region, period |
| Selling Price | Expected price per unit (net of discounts) |
| Sales Revenue | Total expected revenue by product line |
| Sales Mix | Proportion of sales by product category |
Sample Sales Budget Format
| Quarter | Q1 | Q2 | Q3 | Q4 | Total |
|---|---|---|---|---|---|
| Expected Unit Sales | 10,000 | 12,000 | 15,000 | 13,000 | 50,000 |
| × Selling Price | $50 | $50 | $50 | $50 | $50 |
| = Budgeted Revenue | $500,000 | $600,000 | $750,000 | $650,000 | $2,500,000 |
Sales Forecasting Methods
Qualitative Methods
Qualitative methods rely on judgment and expertise rather than statistical analysis:
| Method | Description | Best Use |
|---|---|---|
| Sales Force Composite | Sales staff provide individual forecasts | Close customer relationships |
| Executive Opinion | Senior management consensus | Strategic decisions, new markets |
| Delphi Method | Anonymous expert panel iterates to consensus | New products, uncertain markets |
| Market Research | Surveys, focus groups, test markets | Consumer products, new launches |
| Customer Surveys | Direct customer input on purchasing plans | B2B relationships |
Quantitative Methods
Quantitative methods use historical data and statistical techniques:
| Method | Description | Data Required |
|---|---|---|
| Trend Analysis | Extrapolate historical patterns | Time series data |
| Moving Averages | Average of recent periods | 3-12 periods typically |
| Exponential Smoothing | Weighted average emphasizing recent data | Historical sales |
| Regression Analysis | Statistical relationship with variables | Sales and driver data |
| Time Series Decomposition | Separate trend, seasonal, cyclical patterns | Multi-year data |
Factors Affecting Sales Forecasts
| Internal Factors | External Factors |
|---|---|
| Pricing decisions | Economic conditions |
| Marketing spend | Competitor actions |
| Production capacity | Regulatory changes |
| Product quality | Consumer trends |
| Sales force effectiveness | Seasonal patterns |
The Production Budget
The production budget determines how many units to manufacture to meet sales requirements and maintain inventory levels.
Production Budget Formula
Required Production = Budgeted Sales + Desired Ending Inventory - Beginning Inventory
Or in equation form:
Production Units = Sales + Ending FG Inventory - Beginning FG Inventory
Sample Production Budget
| Quarter | Q1 | Q2 | Q3 | Q4 |
|---|---|---|---|---|
| Budgeted Sales (units) | 10,000 | 12,000 | 15,000 | 13,000 |
| + Desired Ending Inventory | 2,400 | 3,000 | 2,600 | 2,000 |
| = Total Units Needed | 12,400 | 15,000 | 17,600 | 15,000 |
| − Beginning Inventory | (2,000) | (2,400) | (3,000) | (2,600) |
| = Required Production | 10,400 | 12,600 | 14,600 | 12,400 |
Note: Desired ending inventory is often calculated as a percentage of next period's sales (e.g., 20% of next quarter's sales).
Inventory Policy Considerations
| Policy | Description | Impact |
|---|---|---|
| Safety Stock | Buffer against demand uncertainty | Higher inventory costs |
| Just-in-Time | Minimal inventory, rely on suppliers | Lower carrying costs, higher stockout risk |
| Seasonal Build | Produce ahead of peak season | Smooths production, increases storage |
| Level Production | Constant output regardless of sales | Stable workforce, inventory fluctuation |
Direct Materials Budget
The direct materials budget plans for raw material purchases needed for production.
Direct Materials Budget Formulas
Materials Needed for Production:
Materials Needed = Production Units × Materials per Unit
Materials to Purchase:
Purchases = Materials Needed + Desired Ending Materials − Beginning Materials
Purchase Cost:
Purchase Cost = Materials to Purchase × Cost per Unit of Material
Sample Direct Materials Budget
| Quarter | Q1 | Q2 | Q3 | Q4 |
|---|---|---|---|---|
| Required Production (units) | 10,400 | 12,600 | 14,600 | 12,400 |
| × Materials per Unit (lbs) | 3 | 3 | 3 | 3 |
| = Materials Needed (lbs) | 31,200 | 37,800 | 43,800 | 37,200 |
| + Desired Ending Inventory | 7,560 | 8,760 | 7,440 | 6,000 |
| = Total Materials Required | 38,760 | 46,560 | 51,240 | 43,200 |
| − Beginning Inventory | (6,240) | (7,560) | (8,760) | (7,440) |
| = Materials to Purchase | 32,520 | 39,000 | 42,480 | 35,760 |
| × Cost per Pound | $2 | $2 | $2 | $2 |
| = Total Purchase Cost | $65,040 | $78,000 | $84,960 | $71,520 |
Direct Labor Budget
The direct labor budget calculates labor hours and costs required for planned production.
Direct Labor Budget Formula
Direct Labor Cost = Production Units × Labor Hours per Unit × Wage Rate per Hour
Sample Direct Labor Budget
| Quarter | Q1 | Q2 | Q3 | Q4 |
|---|---|---|---|---|
| Required Production (units) | 10,400 | 12,600 | 14,600 | 12,400 |
| × Labor Hours per Unit | 2 | 2 | 2 | 2 |
| = Total Labor Hours | 20,800 | 25,200 | 29,200 | 24,800 |
| × Hourly Wage Rate | $18 | $18 | $18 | $18 |
| = Total Direct Labor Cost | $374,400 | $453,600 | $525,600 | $446,400 |
Workforce Planning Considerations
| Factor | Consideration |
|---|---|
| Overtime | Premium rates for hours exceeding 40/week |
| Hiring/Layoffs | Costs of workforce changes |
| Cross-Training | Flexibility vs. training costs |
| Efficiency Gains | Learning curve effects |
| Labor Availability | Market conditions, skill requirements |
Manufacturing Overhead Budget
The manufacturing overhead budget plans for indirect production costs.
Components of Manufacturing Overhead
| Variable Overhead | Fixed Overhead |
|---|---|
| Indirect materials | Depreciation |
| Indirect labor | Supervisory salaries |
| Utilities (variable portion) | Property taxes |
| Machine maintenance | Insurance |
| Supplies | Rent |
Manufacturing Overhead Budget Formula
Total MOH = Fixed Overhead + (Variable Overhead Rate × Activity Base)
Sample Manufacturing Overhead Budget
| Quarter | Q1 | Q2 | Q3 | Q4 |
|---|---|---|---|---|
| Direct Labor Hours | 20,800 | 25,200 | 29,200 | 24,800 |
| × Variable OH Rate | $5 | $5 | $5 | $5 |
| = Variable Overhead | $104,000 | $126,000 | $146,000 | $124,000 |
| + Fixed Overhead | $80,000 | $80,000 | $80,000 | $80,000 |
| = Total Overhead | $184,000 | $206,000 | $226,000 | $204,000 |
| − Depreciation | ($20,000) | ($20,000) | ($20,000) | ($20,000) |
| = Cash Disbursements | $164,000 | $186,000 | $206,000 | $184,000 |
Note: Depreciation is subtracted because it's a non-cash expense and doesn't require cash outflow.
Predetermined Overhead Rate
Predetermined OH Rate = Estimated Total Manufacturing Overhead ÷ Estimated Activity Base
| Common Activity Bases | Used When |
|---|---|
| Direct labor hours | Labor-intensive operations |
| Machine hours | Automated production |
| Direct labor cost | Wage rates vary by skill |
| Units produced | Homogeneous products |
If budgeted sales are 20,000 units, desired ending finished goods inventory is 3,000 units, and beginning finished goods inventory is 2,500 units, required production is:
Which sales forecasting method involves anonymous experts providing estimates that are iteratively refined until consensus is reached?
Why is depreciation subtracted when calculating cash disbursements in the manufacturing overhead budget?
A company needs 50,000 pounds of material for production. Beginning inventory is 8,000 pounds and desired ending inventory is 10,000 pounds. How many pounds should be purchased?