Responsibility Accounting: Master Budget
The first one being the operating budget-- the first part of the operating budget, which is also the cornerstone of the master budget, is the sales budget. The sales budget will determine what our sales are going to be; this will forecast what we anticipate our sales to be. It’s where an older company would probably forecast this by looking at past sale levels and in projecting hopefully our sales to increase in coming periods and budget accordingly. However, a new company we may have to do industry research to see where other companies in our industry are so that we have an idea for sales budget needs to be now. Once we determine what we are planning to sell, we need to create our inventory budget and determine how much inventory we plan to have left in our ending inventory. With these numbers, we are able to determine, “Well, if we’re going to sell this much and we want to have a certain amount at the end of the period—how much then do we have to purchase?” So if we have our sales budget and our ending inventory (our sales would be directly related to how much we plan to sell—CGS) then we can determine how much inventory we need to purchase. Then we want to project our operating expenses budget; just like it sounds, we want to determine or project what our operating expenses for our business is going to be. Then we can create our budgeted income statement. Part of this master budget is of course a budget for our budget financial statements, this is the first one: budgeted income statement. So that makes up the first set of budgets, called the operating budget.
The second part of the master budget is the capital expenditures budget, which is really just one part on its own. The capital expenditures budget is what we plan to invest in; capital expenditures are depreciable assets like buildings or equipment. So if you plan to invest in the future and if so — in what way and how much and that will all be part of our capital expenditures budget.
The last set that makes up the master budget is the financial budget. The first part of the financial budget is the cash budget. Cash going in, cash going out—that would be part of this budget. Then with the budgeted income statement and the cash budget, we are able to create our budgeted balance sheet. The last part would be the budgeted statement of cash flows. Note here we have our budgeted income statement, our budgeted balance sheet, and our budgeted statement of cash flows that all make up our master budget. All of these parts work together to make that master budget.
Responsibility Accounting: Sales Budget
Let’s look at an example:
Grippers expects to sell 4,000 pairs of shoes for $185 each in January, and 3,500 pairs of shoes for $220 each in February. All sales are cash only. Prepare the Sales Budget for January and February.
The first thing I would do is set up my little grid and then set up my months, January and February, and set up my total column. The first thing I need to do is place my sales price per pair. My sales price per pair in January was $185, and in February it was $220. Next thing I need to do is multiply those numbers times the number of pairs I anticipate selling each month. In January I anticipate selling 4000 pairs, and in February I anticipate selling 3500 pairs. For total sales in January $740,000 and in February $770,000. For the entire period, total sales would be $1,510,000. That’s a very simple sales budget, in this particular case all sales were for cash so we didn’t really have to separate out cash and credit sales in this particular instance. If you did need to do that, you can simply take the sales and say 60% is cash and 40% is credit, you would separate those out for each month.
Let’s give you a chance to look at one:
Mountaineer sells its rock-climbing shoes worldwide. Mountaineers expects to sell 4,000 pairs of shoes for $165 each in January, and 2,000 pairs of shoes for $220 each in February. All sales are cash only. Prepare the Sales Budget for January and February.
Set up your grid and you set up your months, January and February, and your total column. Sales price per pair is $165 in January and $220 in February. The next line is the number of pairs you anticipate selling, 4000 in $440,000. Total sales for the period of $1,100,000.