Creation of an operating budget begins with the preparation of a sales budget. A sales budget is a detailed plan showing the expected sales of a company's products over the course of the budget period. The sales budget is usually created by a company's sales and marketing departments. The sales budget will forecast how many units the company expects to sell and how much it will charge for various products.
To prepare the sales budget, an accountant multiplies forecasted unit sales by the budgeted sales price per unit for all product types and product lines. The total budgeted sales revenue for all products then flows into the pro forma income statement as budgeted sales revenue. If the company is planning price increases or decreases or it is planning to introduce new products or discontinue product offerings, then managers should make sure that the sales budget reflects this information. Sometimes the creation of a sales budget may require the use of sophisticated models and statistical tools that assist company analysts in making their projections more accurate.
Heavenly Sleep Systems is beginning the budget process for the new year. Its first step is the sales budget. Heavenly sells its units at $100 each in the first half of the year and intends to raise prices to $110 for the second half of the year. The company estimates that it will sell 12,000 units in Quarter 1, 10,000 in Quarter 2, 12,050 in Quarter 3, and 14,000 in Quarter 4.
Sample Sales Budget
| Heavenly Sleep Systems Sales Budget For Year Ended December 31, 2019 |
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|---|---|---|---|---|
| Quarter 1 | Quarter 2 | Quarter 3 | Quarter 4 | |
| Budgeted Sales (Units) | 12,000 | 10,000 | 12,050 | 14,000 |
| Sales Price per Unit | $100 | $100 | $110 | $110 |
| Budgeted Sales (in $) | $1,200,000 | $1,000,000 | $1,325,500 | $1,540,000 |
The sales budget indicates how many units and at what price the company anticipates selling during the year.
Questions to Ask about the Sales Budget
After the creation of the sales budget, the company can create its selling and administrative expense budget. To support the sales levels forecasted in the sales budget, a company will have administrative expenses. The selling and administrative expense budget estimates when and how much of these costs the organization will incur. Items that typically appear in a selling and administrative expense budgets are non-product costs, also referred to as period costs. Examples of such costs are administrative salaries, advertising, sales commissions, office building rent and utilities, and other such expenses that are not directly related to making products.
Heavenly plans to have four sales representatives in the first half of the year and six representatives on staff in the second half of the year to support higher sales in the second half of the year. Each sales representative earns $5,000 per quarter plus 2% commission on sales. Heavenly also plans to have three administrative assistants to handle general office duties. Each of the administrative assistants will also earn $5,000 per quarter. Finally, Heavenly plans to spend $25,000 per quarter on a new advertising campaign.
Sample Sales and Administrative Budget
| Heavenly Sleep Systems Sales and Administrative Budget For Year Ended December 31, 2019 |
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|---|---|---|---|---|
| Quarter 1 | Quarter 2 | Quarter 3 | Quarter 4 | |
| Sales Staff Wages | $20,000 | $20,000 | $30,000 | $30,000 |
| Sales Commissions | $24,000 | $20,000 | $26,510 | $30,800 |
| Administrative Staff | $15,000 | $15,000 | $15,000 | $15,000 |
| Advertising | $25,000 | $25,000 | $25,000 | $25,000 |
| Total Selling and Administrative Costs | $84,000 | $80,000 | $96,510 | $100,800 |
The sales and administrative budget outlines the sales and administrative costs for the coming year.