Sales Budget:
Learning Objectives:
- Define and explain sales budget.
- Give and example of sales budget.
Contents:
-
Definition and explanation of sales budget
-
Example
A sales budget is a detailed schedule showing the expected sales for the
budget period; typically, it is expressed in both dollars and units of
production. An accurate sales budget is the key to the entire budgeting in some
way. If the sales budget is sloppily done then the rest of the budgeting process
is largely a waste of time.
The sales budget will help determine how many units will have to be produced.
Thus, the production budget is prepared after the sales budget. The production
budget in turn is used to determine the budgets for manufacturing costs
including the
direct materials budget, the
direct labor budget, and the
manufacturing overhead budget. These budgets are then combined with data
from the sales budget and the
selling and
administrative expenses
budget to
determine the
cash budget.
In essence, the sales budget triggers a chain reaction that leads to the
development of the other budgets. The
selling and administrative expenses budget
is both dependent on and a determinant of the sales budget. This reciprocal
relationship arises because sales will in part be determined by the funds
committed for advertising and sales promotion.
The sales budget is the starting point in
preparing the master budget. All other items in the master budget including
production, purchase, inventories, and expenses, depend on it in some way. The
sales budget is constructed by multiplying the budgeted sales in units by the
selling price.
Following is the sales budget of Hampton Freeze
Inc. (see
explanation of this budget)
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HAMPTON
FREEZE, INC.
Sales Budget
For the Year Ended December 31, 2003 |
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|
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|
Quarter |
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|
1 |
2 |
3 |
4 |
Year |
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Budgeted sales in cases |
10,000 |
30,000 |
40,000 |
20,000 |
100,000 |
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Selling price per case |
$ 20.00 |
$ 20.00 |
$ 20.00 |
$ 20.00 |
$ 20.00 |
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|
------------ |
------------ |
------------ |
------------ |
------------ |
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Total sales |
$ 200,000 |
$600,000 |
$800,00 |
$400,000 |
2,000,000 |
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Percentage of sales collected in the period
of the sales |
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70% |
|
|
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Percentage of sales collected in the period
after the sales |
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30% |
|
|
|
|
70% |
30% |
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Schedule of Expected Cash Collections |
|
1 |
Accounts receivable, beginning balance |
$90,000 |
|
|
|
$90,000 |
|
2 |
First quarter sales |
140,000 |
$60,000 |
|
|
200,000 |
|
3 |
Second quarter sales |
|
420,000 |
$180,000 |
|
600,000 |
|
4 |
Third quarter sales |
|
|
560,000 |
$240,000 |
800,000 |
|
5 |
Fourth quarter sales |
|
|
|
280,000 |
280,000 |
|
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----------- |
----------- |
----------- |
----------- |
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6 |
Total cash collections |
$230,000 |
$480,000 |
$740,000 |
$520,000 |
$1,970,000 |
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1 |
Cash collections from last years
fourth-quarter sales. |
|
2 |
$200,000 × 70%; $200,000 × 30% |
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3 |
$600,000 × 70%; $600,000 × 30% |
|
4 |
$800,000 × 70%; $800,000 × 30% |
|
5 |
$400,000 × 70% |
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6 |
Uncollected fourth quarter sales appear as
accounts receivable on the company's end of year balance sheet. |
This example contains the sales budget for
Hampton Freeze for the year 2009, by quarters. Notice from the example that the
company plans to sell 100,000 cases of popsicles during the year, with sales
peaking in the third quarter.
After preparing sales budget, a schedule of
expected cash collections is also prepared such as the one that appear in
our example. Cash collections consists of sales made to customers in prior
periods plus collections on sales made in the current budget period. In our
example, 70% of sales are collected in the quarter in which the sales are made
and the remaining 30% are collected in the following quarter. For example, 70%
of the first quarter sales of $200,000 (or 140,000) is collected during the
first quarter and 30% (or $60,000) is collected during the second quarter.
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