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
Price	$5	$4	$4.20
Sales Revenue	$12,500	$40,000	$52,500

The average price shown under the Total column is the average price based on total sales revenue divided by total units .

The next budget to be developed is the production budget. This budget is based on units only - not dollars . The production budget requires the budgeted unit sales, the desired ending inventory units, and the beginning inventory units. Suppose a company expected monthly sales in the first quarter of 10,000, 12,000, and 13,000 units. Expected April sales are 13,500. The company policy is to have 10% of the next month's sales in ending inventory; it started the quarter with 1,600 units in inventory. The quarter's production budget would be the following:

	January	February	March	Total
Sales	10,000	12,000	13,000	35,000
+ Desired ending inventory	1,200	1,300	1,350	3,850 (WRONG)
Total units needed	11,200	13,300	14,350	38,850 (WRONG)
- Beginning inventory	1,600	1,200	1,300	4,100 (WRONG)
Units to be produced	9,600	12,100	13,050	34,750

PLEASE HELP FIX WRONG ONES! Thank you :)