The sales, production and materials budgets

Accounting Ahead | Original study resource | accountingahead.com.au

The sales, production and materials

budgets

MODULE 3 | PART B.1 | STUDENT COMPANION

A master budget is a set of linked budgets for the coming period, drawing on the operational plan, past results

and predictions. Financial planning models, enterprise system data and what-if (sensitivity) analysis help prepare

it.

Factors that shape the budget

International organisations add cultural and legal differences, economies that move differently, currency

translation and different inflation rates.

External Internal

Demand and market research; suppliers and input prices Capacity and supply constraints

Economy at home and worldwide; industry trends Planned advertising and promotions; pricing and

inventory policies

Competitors, new entrants, substitutes; changing tastes

and fads

New products from research and development; product

improvements

New laws and taxes; political change; technology Changes in operations, management, and sales or

product mix

Natural events: floods, bushfires, droughts Budget politics: game playing and empire building

Why accuracy matters: an over-optimistic sales budget builds excess stock that may be discounted or

sold at a loss; an over-pessimistic one causes shortages, lost sales and lost customers. Too little raw

material can stop production; too much adds storage, insurance, handling and obsolescence costs.

STRATEGIC MANAGEMENT ACCOUNTING | M3 PART B.1 | STUDENT COMPANION

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Accounting Ahead | Original study resource | accountingahead.com.au

The operating budget for a manufacturer

1. Sales budget

Drives everything

2. Production budget

Units to make

3. Direct materials

Used and purchased

4. Direct labour

Hours and cost

5. Manufacturing

overhead

Variable and fixed

6. Finished goods

inventory

Units x unit cost

7. Cost of goods sold

Into the income statement

8. Period costs

Selling, admin, R&D,

distribution

Steps 2 to 7 budget production; step 8 budgets the rest of the value chain

Step 1: the sales budget

Led by sales staff, using customer system data, statistical methods (trend analysis, regression, probability) and

sometimes market research; production managers check it can be supplied. Blue Wren Drinkware (imagined):

9,600 bottles in July at $30 = $288,000.

Step 2: the production budget

Blue Wren Drinkware: production budget for July Bottles

Budgeted sales 9,600

Add: desired closing finished goods (25% of August sales of 9,600) 2,400

Total needed 12,000

Less: opening finished goods (2,000)

Bottles to produce 10,000

Production = sales + desired closing stock - opening stock

STRATEGIC MANAGEMENT ACCOUNTING | M3 PART B.1 | STUDENT COMPANION

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Accounting Ahead | Original study resource | accountingahead.com.au

Step 3: the direct materials budget

Blue Wren: direct materials budget for July Kilograms Cost at $6/kg

Steel needed for production (10,000 x 0.5 kg) 5,000 $30,000 (used)

Add: desired closing steel 1,000

Total needed 6,000

Less: opening steel (800)

Steel to purchase 5,200 $31,200 (purchased)

Purchases = material for production + desired closing stock - opening stock

The purchasing manager answers for the price of materials; the production manager answers for usage. If

cheaper steel dents more easily and scrap rises, production explains the usage, but the cause sits in purchasing:

coordination matters.

STRATEGIC MANAGEMENT ACCOUNTING | M3 PART B.1 | STUDENT COMPANION

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Accounting Ahead | Original study resource | accountingahead.com.au

Practice questions

MODULE 3 | PART B.1 | TRY THESE BEFORE THE WORKED ANSWERS

Ridgeway Boards (imagined) makes skateboards. Budgeted sales: July 4,000; August 5,000; September

4,500; October 4,000 boards. Desired closing finished goods = 20% of next month's sales. Opening finished

goods for July: 800 boards. Each board uses 2 kg of timber at $5 per kg. Desired closing timber = 10% of next

month's production needs. Opening timber for July: 900 kg.

Question 1 - Production budget

Boards July August

Budgeted sales

Add: desired closing finished goods

Total needed

Less: opening finished goods

Boards to produce

Hint: you will also need September's production to set August's closing timber.

Question 2 - Direct materials budget

Timber July August

Timber needed for production (kg)

Add: desired closing timber (kg)

Total needed (kg)

Less: opening timber (kg)

Timber to purchase (kg)

Cost of timber purchased

Cost of timber used

STRATEGIC MANAGEMENT ACCOUNTING | M3 PART B.1 | STUDENT COMPANION

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Accounting Ahead | Original study resource | accountingahead.com.au

Question 3 - Factors for Ridgeway's sales budget

Name four external and four internal factors that should shape Ridgeway's sales budget.

STRATEGIC MANAGEMENT ACCOUNTING | M3 PART B.1 | STUDENT COMPANION

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Accounting Ahead | Original study resource | accountingahead.com.au

Worked answers

MODULE 3 | PART B.1 | WORKED ANSWERS - ATTEMPT THE QUESTIONS FIRST

Question 1 - Production budget

Boards July August

Budgeted sales 4,000 5,000

Add: desired closing finished goods (20% of next month) 1,000 900

Total needed 5,000 5,900

Less: opening finished goods (800) (1,000)

Boards to produce 4,200 4,900

September production (for August's closing timber): 4,500 + 800 (20% of October) - 900 = 4,400 boards.

Question 2 - Direct materials budget

Timber July August

Needed for production (x 2 kg) 8,400 9,800

Add: desired closing timber (10% of next month's needs) 980 880

Total needed 9,380 10,680

Less: opening timber (900) (980)

Timber to purchase (kg) 8,480 9,700

Cost of timber purchased ($5/kg) $42,400 $48,500

Cost of timber used ($5/kg) $42,000 $49,000

Question 3 - Factors for Ridgeway's sales budget

External: demand trends in skateboarding; competitors' prices and new entrants; economic conditions affecting

household spending; timber supply and prices; import tariffs or product safety rules; fads. Internal: factory

capacity; planned promotions; pricing and inventory policies; new board designs; changes in product mix; budget

gaming by sales staff.

STRATEGIC MANAGEMENT ACCOUNTING | M3 PART B.1 | WORKED ANSWERS

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