In estimating the quantity of sales for each product, past sales volumes are often used as a starting point. These amounts are revised for factors expected to affect future sales, such as the following: •Backlog of unfilled sales orders •Planned advertising and promotion •Expected industry and general economic conditions •Productive capacity •Projected pricing policy •Findings of market research studies Once an estimate of the sales volume is made, the expected sales revenue is determined by multiplying the volume by the expected unit sales price. For control purposes, management can compare actual sales and budgeted sales by product, region, or sales representative. Management would investigate any significant differences and take possible corrective actions. Sales Budget for Elite Accessories Inc. Production Budget Production should be carefully coordinated with the sales budget to ensure that production and sales are kept in balance during the period. The number of units to be manufactured to meet budgeted sales and inventory needs for each product is set forth in the production budget. The budgeted volume of production is determined as follows:
Expected units to be sold + Desired units in ending inventory - Estimated units in beginning inventory = Total units to be producedBelow is the production budget for Elite Accessories Inc. Direct Materials Purchases Budget The production budget is the starting point for determining the estimated quantities of direct materials to be purchased. Multiplying these quantities by the expected unit purchase price determines the total cost of direct materials to be purchased. Materials required for production + Desired ending materials inventory - Estimated beginning materials inventory = Direct materials to be purchasedIn Elite Accessories Inc.’s production operations, leather and lining are required for wallets and handbags. The direct materials purchases budget is prepared. As shown in the budget, for Elite Accessories Inc. to produce 520,000 wallets, 156,000 square yards (520,000 units x 0.30 square yard per unit) of leather are needed. Likewise, to produce 292,000 handbags, 365,000 square yards (292,000 units x 1.25 square yards per unit) of leather are needed. We can compute the needs for lining in a similar manner. Then adding the desired ending inventory for each material and deducting the estimated beginning inventory determines the amount of each material to be purchased. Multiplying these amounts by the estimated cost per square yard yields the total materials purchase cost. The direct materials purchases budget helps management maintain inventory levels within reasonable limits. For this purpose, the timing of the direct materials purchases should be coordinated between the Purchasing and Production Departments.