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 12,950 units of Product A at $6.00 each and 51,800 of Product B at $4.20 each. Here is a sales budget for Ellsworth Company.

	Product A	Product B	Total
Units	12,950	51,800	64,750
x Price	x $6.00	x $4.20	x $4.56
Sales Revenue	$77,700	$217,560	$295,260

The average price shown under the Total column is - Select your answer -the average of $6.00 and $4.20the average price based on total sales revenue divided by total unitsItem 1 .

The next budget to be developed is the production budget. This budget is based on - Select your answer -cost of productionvalue of units producedunits only - not dollarsItem 2 . 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 9,950, 12,050, and 12,850 units. Expected April sales are 13,600. The company policy is to have 10% of the next month's sales in ending inventory; it started the quarter with 1,700 units in inventory. The quarter's production budget would be the following:

	January	February	March	Total
Sales
+ Desired ending inventory
Total units needed
- Beginning inventory
Units to be produced

The desired ending inventory for February is equal to - Select your answer -ten percent of February salesten percent of March salesten percent of January salesItem 23 . The desired ending inventory for the total column for the first quarter is equal to - Select your answer -ten percent of February salesten percent of March salesthe ending inventory for Marchthe sum of the ending inventories for the three months of the quarterItem 24 . How many production budgets are prepared? - Select your answer -One for the year broken down into monthsOne for the year broken down into quartersAs many production budgets as there are separate productsItem 25 .

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 - Select your answer -production budgetssales budgetstypes of different direct materials used in productionItem 26 . 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 9,455 units, 12,130 units, and 12,925 units. Each unit takes 3 pounds of Material A and 4 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 (5,673 pounds of Material A and 7,564 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
x DM per unit produced	x	x	x
DM needed for production
+ Desired ending inventory
Total units needed
- Beginning inventory
Units to be purchased

Purchases Budget for Material B
	January	February	March
Budgeted units produced
x DM per unit produced	x	x	x
DM needed for production
+ Desired ending inventory
Total units needed
- Beginning inventory
Units to be purchased

The desired ending inventory for Material B for February is equal to - Select your answer -twenty percent of February productiontwenty percent of March productiontwenty percent of March production times direct materials per unittwenty percent of February production times direct materials per unitItem 61 . The beginning inventory for January is equal to - Select your answer -twenty percent of January production times direct materials per unittwenty percent of February production times direct materials per unittwenty percent of January productionItem 62 . We cannot complete a direct materials purchases budget for March because - Select your answer -we do not know March saleswe do not know April saleswe do not know April productionwe can complete a direct materials purchases budget for March we just didn't do it.Item 63 Hint on the purchases budget: This one is very easy to fill in because all row headings are provided. If you are preparing a purchases budget on your own, don't forget to include the line that multiplies the units produced by the direct materials per unit. Remember - we're dealing with units of direct materials here - not units of final product.