Preparing the Operating Budgets

Preparing the Operating Budgets - Preparing the Operating...

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Preparing the Operating Budgets We use a case study of Hayes Company in preparing the operating budgets. Hayes manufactures and sells a single product, Kitchen-Mate. The budgets are prepared by quarters for the year ending December 31, 2010. Hayes Company begins its annual budgeting process on September 1, 2009, and it completes the budget for 2010 by December 1, 2009. Sales Budget Helpful Hint For a retail or manufacturing company, what is the starting point in preparing the master budget, and why? Answer: The sales budget is the starting point for the master budget. It sets the level of activity for other functions such as production and purchasing. As shown in the master budget in Illustration 20-2 , the sales budget is the first budget prepared . Each of the other budgets depends on the sales budget. The sales budget is derived from the sales forecast . It represents management's best estimate of sales revenue for the budget period. An inaccurate sales budget may adversely affect net income. For example, an overly optimistic sales budget may result in excessive inventories that may have to be sold at reduced prices. In contrast, an unduly conservative budget may result in loss of sales revenue due to inventory shortages. Forecasting sales is challenging. For example, consider the forecasting challenges faced by major sports arenas, whose revenues depend on the success of the home team. Madison Square Garden's revenues from April to June were $193 million when the Knicks made the NBA playoffs. But revenues were only $133.2 million a couple of years later when the team did not make the playoffs. Or consider the challenges faced by Hollywood movie producers in predicting the complicated revenue stream produced by a new movie. Movie theater ticket sales represent only 20% of total revenue. The bulk of revenue comes from global sales, DVDs, video-on- demand, merchandising products, and videogames, all of which are difficult to forecast. The sales budget is prepared by multiplying the expected unit sales volume for each product by its anticipated unit selling price . Hayes Company expects sales volume to be 3,000 units in the first quarter, with 500-unit increases in each succeeding quarter. Illustration 20-3 shows the sales budget for the year, by quarters, based on a sales price of $60 per unit.
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Illustration 20-3 Sales budget Some companies classify the anticipated sales revenue as cash or credit sales and by
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This note was uploaded on 11/08/2011 for the course ACCOUNTING ac 202 taught by Professor - during the Fall '11 term at Montgomery.

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Preparing the Operating Budgets - Preparing the Operating...

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