Sales and Production Budgets

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Sales and Production Budgets
Lecture 2

• The starting point for operating budgets

2
The Planning and Decision Making Module
is a continuation of the discussion about
planning in a business environment. The
emphasis in this module is

the
process and the tools we use
to develop a
sales forecast and pro
forma statements from
which
functional areas develop their

plans.
3
Several Kinds of Budgets

Budgets

• Sales budgets
• Production and purchase budgets
• Overhead and support budgets
• Cash budget
• Proforma Income Statement
• Proforma Balance Sheet

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How do we begin our budget?

• The sales (or services) projections come first
• Works differently with governmental and nonprofit
  agencies

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Interrelated Budgets
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Factors in Sales Budget
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Sales Targets For Each Product
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Sales Budget

• Sales budget must contain both units and dollars
• Units are used to plan production
• Dollars are used to plan cash flow and projected
  net income

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Sales Budget Example

• January February March
• Units 40,085 42,490 44,500
• Price 44 44
  44
• Sales
• Revenue 1,763,740 1,869,560 1,958,000

Projected revenue planned selling price
number of units expected to be sold
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How to Determine Sales Volume?

• Projection

Targeting

• Forecasting Sales Growth Rate
• Time Trend

Making a goal based on strategy
C-V-P Analysis is useful.
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Cost-Volume-Profit (C-V-P) Analysis
Sales Revenue ? Variable Costs ? Fixed
Costs Profit
(Sales price Units) ? (Variable cost
Units) ? Fixed Costs Profit
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Accounting TermsVariable vs. Fixed Costs

• Variable Costs are costs that vary in total
  directly and proportionately with changes in the
  activity level.
• E.g., direct materials, direct labor, cost of
  goods sold, sales commissions, freight-out for a
  merchandiser, gasoline in airlines
• Fixed Costs are costs that remain the same in
  total regardless of changes in the activity
  level.
• E.g., property taxes, insurance, rent,
  supervisory salaries, depreciation.

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Accounting TermVariable vs. Fixed Costs
(Conted)
Variable Costs per Unit
Total Variable Costs


Activities
Activities
Fixed Costs per Unit
Total Fixed Costs


Activities
Activities
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Accounting TermsContribution Margin

• Contribution Margin is the amount of revenue
  remaining after deducting variable costs.
• Contribution Margin
• Revenue Variable Costs
• Contribution Margin Ratio is the contribution
  margin divided by total sales.
• Contribution Margin Ratio
• Contribution Margin
• Total Sales
• Contribution Margin per Unit
• Unit Selling Price

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Break-Even Point

• BEP means the volume of sales at which total
  revenues equal total costs, or where profit is
  zero.

Revenues ?Variable Costs ?Fixed Costs 0
or
Revenues ?Variable Costs Fixed Costs
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Example

• Requirement
• Whats the BEP?
• Assume that Jewel Corp.s target profits is
  9,000. How much firm should generate revenue?

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Short Cut Formula for BEP
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Short Cut Formula for BEP
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Your Turn BEP Analysis

• Lombardi Company has a unit selling price of
  400, variable costs per unit of 240, and fixed
  costs of 160,000.
• Q 1. Whats the minimum number of product to sell
  to avoid loss?
• Q2. Whats the amount of sales (dollar) if the
  company want to make profit of 100,000?

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HW 5

• CVP Analysis in WebCT

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How to decide price?

• Cost-based (Cost-Plus) Pricing
• Market-Based Pricing
• (Target Costing)

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Cost-Based Pricing

• Add a markup component to the cost base to
  determine a prospective selling price

Example Astels engineers has policy to use
12 markup on the full unit cost of the product.
Astels unit cost is 720. What is selling price?
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Your Turn Cost-Based Pricing

• ABC use cost-based pricing. Following is the
  information of unit cost and mark-up. Whats the
  selling price?

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Market-Based Pricing (Target Costing System)

• Determine target price based on strategic
  decision.

Design (or Redesign) target cost structure to
meet target price and target rate of return.