The Operating Budgets: Sales, Production and Purchases

The sales budget is created first and includes the number of units expected to be sold of each product times the expected price. In this way, total sales revenue, which will feed into the budgeted income statement, is budgeted.

Example: Ellsworth Company sells two products, Product A and Product B$.$ Next year, Ellsworth expects to sell $2,500$ units of Product A at $$5$ each and $10,000$ of Product B at $$4$ each. Develop a sales budget for Ellsworth Company.

Product A

Product B

Total

Units

$2,500$

$10,000$

$12,500$

$\backslash$times Price

$\backslash$times $$5$

$\backslash$times $$4$

$\backslash$times $$4\mathrm{.}20$

Sales Revenue

$$12,500$

$$40,000$

$$52,500$

The direct materials purchases budgets can be prepared after the production budgets are complete. There are as many direct materials purchases budgets as there are

types of different direct materials used in productionproduction budgetssales budgettypes of different direct materials used in production.The purchases budget requires the budgeted production in units, the desired ending inventory of direct materials in units, and the beginning inventory in units. Suppose a company expected monthly production in the first quarter of $9,600$ units, $12,100$ units, and $13,050$ units. Each unit takes $2$ pounds of Material A and $3$ pounds of Material B$,$ Company policy is that sufficient raw materials should be in ending inventory to satisfy $20\%$ of the next month's production needs. Beginning inventory for each material satisfied that requirement $(3,840$ pounds of Material A and $5,760$ pounds of Material B$).$ The direct materials purchases budgets for January and February are as follows:

Purchases Budget for Material A:

January

February

March

Budgeted units produced

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$\backslash$times DM per unit produced

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DM needed for production

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$+$ Desired ending inventory

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Total units needed

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$-$ Beginning inventory

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Units to be purchased

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Purchases Budget for Material B:

January

February

March

Budgeted units produced

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$\backslash$times DM per unit produced

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DM needed for production

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$+$ Desired ending inventory

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Total units needed

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$-$ Beginning inventory

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Units to be purchased

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