When creating a sales budget you must include external factors such as market demand at different price levels and internal factors such as producti

Sales Budget:

When creating a sales budget you must include external factors such as market demand at different price levels and internal factors such as production and storage capacity. Failure to integrate these factors may create unachievable budgets and, in turn, lead to decreases in employee motivation. The cash collections from the sales budget will be incorporated into the cash budget.

Forecast sales (units)

x Unit sale price

- Revenue

Production Budget:

To determine the amount of goods to be produced in a particular period, you will need to determine the level of sales and then consider the current and required levels of inventory. Setting sales and production budgets is usually an iterative process in which the sales and production teams need to communicate to ensure that the number of units expected to be sold can be produced.

Forecast sales

+ finished goods inventory required at the end of the

period

finished goods inventory from the start of the period

Production requirements (units)

Direct Labour Budget:

If goods or services are being produced, a direct labour budget and a raw materials purchases/usage budget are required. The final data from the production budget (production requirements) becomes the starting point for both of these budgets.

Production requirement (units)

X direct labour hours per unit of production

X direct labour cost per hour

Total direct labour cost

Raw materials purchases and usage budget

A raw materials budget is created by combining the production requirements identified earlier

with the required levels of raw materials inventory. From this, the amount of raw materials to

purchase as well as the cost can be calculated. The cost information from the direct labourbudget and raw materials budget will be fed into the cash budget, which will project when

payments will be required.

Lecture example