Sales Budget

It is now time to look at budgeting in a manufacturing environment. The primary difference in budgeting is that rather than sales driving purchases, in a manufacturing environment budgeted sales drive production. Production budgets require additional budgeting for direct materials (raw materials, parts, and ingredients), direct production labor, and manufacturing overhead. Refer to the illustration of the manufacturing process within this module.

The sales budget for manufacturing reflects the same influences as that of retailers or service companies: forecasted sales volume based on previous sales patterns, planned promotions, activities of competitors, current and expected economic conditions, etc. (Jerry Weygandt and Paul Kimmel, and Donald E. Keiso, Managerial Accounting: Tools for Business Decision Making, 5th ed., (New Jersey: Wiley, 2009), 394,408).

 

Overly optimistic sales budgets can result in excessive inventory which ties up cash, increases warehousing costs and results in "liquidation" sales to discount/outlet businesses with heavy markdowns. Highly conservative sales estimates can lead to increased production costs, thus lowering net income, due to adding extra production shifts or running overtime to try to meet the unanticipated demand for the product. Both over and under estimating sales impacts the income statement.  (Jerry Weygandt and Paul Kimmel, and Donald E. Keiso, Managerial Accounting: Tools for Business Decision Making, 5th ed., (New Jersey: Wiley, 2009), 407-8). 

 

Manufacturing Master Budget Video

Please watch the following video The Various Components of a Master Budget

"21 - The Various Components of a Master Budget," YouTube Video, 9:27, Posted by "Larry Walther," Published on March 23, 2013, https://www.youtube.com/watch?v=yjtbss4zTvs

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Activity

Please complete the following activity.

 

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