Chapter 38
Managerial Accounting
Sales, Production, and
Purchases Budgets
Prepared by Diane Tanner
University of North Florida
Master Budget
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 A comprehensive planning document
 Incorporates a number of individual budgets
Replaced by an ‘inventory
purchases’ budget for
merchandising companies,
or by ‘cost of services’
budget for service
companies
Sales budget
Production budget
Materials purchases budget
Direct labor budget
Manufacturing overhead budget
Selling and administrative budget
Capital acquisitions budget
Budgeted statement of cash flows
Cash budget
Budgeted income statement
Budgeted balance sheet
The Flow of Budgets in the Master Budget
Sales
Budget
Materials
Purchases
Budget
Production
Budget
Selling and
Administrative
Budget
Direct
Labor
Budget
Manufacturing
Overhead
Budget
Cash
Budget
Budgeted Financial Statements
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Sales Budget
 First step in the budget process
 Why?
 Subsequent budgets cannot be prepared
without an estimate of sales
 Involves forecasting sales
 Based on various methods including
 Econometric models
 Previous sales trends
 Trade journals and magazines
 Sales force estimates
Sales Budget Example
 DartCo’s selling price is $10 per bucket for April with a
5% increase per month thereafter.
 Budgeted sales for the next five months are:
 April
3,200 units
 May
4,000 units
 Then 10% increase per month thereafter
Budgeted sales (units)
Selling price per unit
Total sales
April
May
June
3,200
4,000
4,400
$10.00 $10.50 $11.03
$32,000 $42,000 $48,510
 While this budget covers 3 months, management
often prepares annual, quarterly, and monthly
budgets
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Production Budget
The only budget in the master
budget that is prepared in ‘units’
Budgeted sales of finished units
+ Desired ending inventory of finished units
− Beginning inventory of finished units
= Finished goods units to be produced
Sales
Budget
Production
Budget
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Production Budget Example
Trump Inc. produces trinkets. Each trinket requires 0.4 board feet of wood and
1.25 hours of direct labor. Wood costs $1.40 per board foot. Trump desires to have
20% of the materials needed for production during the next month on hand at the
end of each month, and 15% of the number of trinkets to be sold the next month
on hand at the end of each month. Scheduled sales of trinkets for April are 4,200,
May is 4,500, and June is 5,200 units. Prepare a production budget for May.
Begin with units to
be sold
Trinkets to be sold
Add ending FG
inventory desired:
15% x 5,200
Ending FG inventory desired
Subtract beginning
FG inventory desired:
15% x 4,500
Add the ending and
subtract beginning
inventories
4,500
780
Beginning FG inventory to be on hand
(675)
Budgeted trinkets to be produced
4,605
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Direct Materials Purchases Budget
Step 1: Begin with units to be sold
Step 2: Convert to the RM denomination, i.e., in what quantities are
materials purchased from suppliers
Such as…pounds, yards, kilograms, linear feet
Step 3: Multiply to determine the quantity needed for production
Step 4: Add desired ending RM inventory
Step 5: Subtract expected beginning RM inventory
Step 6: Multiply the materials quantity to be purchased times the
cost per unit of material
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Materials Purchases Budget Format
Budgeted finished units to be produced
x Raw materials needed for each finished goods unit
= Total raw materials units needed for production
+ Desired raw materials ending inventory
− Beginning raw materials on hand
= Raw materials needed to purchase
x Cost per raw materials unit
= Budgeted cost of purchases
Denominated in
‘units’ in which the
raw materials are
inventoried.
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Materials Purchases Budget Example
Trump Inc. produces trinkets. Each trinket requires 0.4 board feet of wood, costing
$1.40 per board foot. Trump desires to have 20% of the materials needed for
production during the next month on hand at the end of each month, and 15% of
the number of trinkets to be sold the next month on hand at the end of each
month. Scheduled production of trinkets for May is 4,605 and June is 5,100 units.
Prepare a materials purchases budget for May.
Begin with FG units to
be produced
Trinkets to be produced
4,605
Convert to RM
denomination
Wood (board feet) required for each trinket
Multiply to get total
needed for production
Board feet of wood needed for production
Add ending RM
inventory desired:
20% x 5,100 x 0.4 feet
Ending RM inventory desired
Subtract beginning
RM inventory desired:
20% x 4,605 x 0.4 feet
Beginning FG inventory to be on hand
0.40
1,842
408
Continued
(368)
Materials Purchases Budget Example
Each trinket requires 0.4 board feet of wood, costing $1.40 per board foot. Trump
desires to have 20% of the materials needed for production during the next month
on hand at the end of each month, and 15% of the number of trinkets to be sold
the next month on hand at the end of each month. Scheduled production of
trinkets for May is 4,605 and June is 5,100 units. Prepare a materials purchases
budget for May.
Add the ending and
subtract beginning
inventories
Budgeted board feet to purchase
Indicate the cost per
RM denomination
Cost per board foot
$ 1.40
Multiply to
determine the cost of
materials purchases
Budgeted cost of materials purchases
$9,082
6,487
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Hints
 Must clearly distinguish between the two types
of inventory in budgets
 Companies produce and sell finished goods
So….
 Sales budget uses only units to be sold
 The production budget determines finished
units to be produced
 Materials purchases budget units are
denominated in raw materials units; it ultimately
determines the raw materials units to be
purchased
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The End
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