Sales, Production & Purchases Budgets (Cambridge International A-Level Accounting)

Sales budget

Spec point — how to prepare the following budgets: – sales

Sales budget

How to prepare a sales budget?

• The sales budget is based on selling price and volume of sales
• Here is an example of what a sales budget would look like

Example of a sales budget

• STEP 1 Calculate the selling price relevant to the period needed

• STEP 2 Calculate the number of units to be sold for each period

• STEP 3 Calculate the total revenue for the period

  • Revenue = selling price × units sold

Worked Example Games Ltd makes games consoles. The following information is provided:

	January	February	March
Selling price per unit	$20	Increase by 10% from January	Increase by a further 5% from February
Units sold	10 000	Reduced by 2% from January	Reduced by a further 8% from February

Prepare the sales budget for January, February and March

Answer

• Calculate the selling price for each month

January = $20

February = $20 + 10% = $22

March = $22 + 5% = $23.10

• Calculate the units sold for each month

January = 10 000

February = 10 000 - 2% = 9 800

March = 9 800 - 8% = 9 016

• Calculate the revenue for each month

*January = 10 000 × $20 = *$200 000

February = 9 800 × $22 =** $215 600**

*March = 9 016 × $23.10 = *$208 269.60

• The answer will be shown as the sales budget:

	January	February	March
Units sold	10 000	9 800	9 016
Selling price $	20	22	23.10
Revenue $	200 000	215 600	208 269.60

Production budget

Spec point — "how to prepare the following budgets: – production

Production budget

How to prepare a production budget?

• The production budget is the number of units needed for production for a particular period
• Everything in a production budget is calculated in units
• Here is an example of what a production budget would look like

Example of a production budget

• STEP 1 Find the units sold

  • This is taken from the sales budget

• STEP 2 Minus the opening inventory as this is already produced and does not need producing

  • The opening inventory will be the closing inventory of the last period

• STEP 3 Add the closing inventory

  • This will depend on what inventory levels are needed
  • This is usually based on a % of sales of the next period

• STEP 4 Calculate the production needed for each period

  • Add the sales and closing inventory
  • Minus the opening inventory

Worked Example Games Ltd makes games consoles. The following information is provided:

	January	February	March
Units sold (based on sales budget)	10 000	9 800	9 016
Closing inventory	Based on 20% of sales for the next month	Based on 25% of sales for the next month	Based on 18% of sales for the next month

Additional information

• The opening inventory in January is expected to be 2 000 units
• The units sold in April is expected to be 9 000 units

Prepare the production budget for January, February and March

Answer

• Calculate the closing inventory for each period

January = 9 800 × 20% = 1 960 units

February = 9 016 × 25% = 2 254 units

March = 9 000 × 18% = 1 620 units

• Calculate the production for each month

*January = 10 000 - 2 000 + 1 960= 9 960 units

*February = 9 800 - 1 960 + 2 254 =10 094 units

*March = 9 016 - 2 254 + 1 620= 8 382 units

	January	February	March
Units sold	10 000	9 800	9 016
-Opening inventory	(2 000)	(1 960)	(2 254)
+Closing inventory	1 960	2 254	1 620
= Production	9 960	10 094	8 382

Purchases budget

Spec point — how to prepare the following budgets: – purchases

Purchases budget

How to prepare a purchases budget?

• The purchases budget is based on the material needed for the units of production
• The purchase budget is based on the cost price and volume of material
• Here is an example of what a purchases budget would look like

Example of a purchases budget

• STEP 1 Calculate the cost price relevant for the material for making one unit

• STEP 2 Find the production in units for the period needed

  • This can be taken from the production budget
  • Multiply the production in units by the material cost price per unit

• STEP 3 Find the opening inventory valuation

  • This will be same as the closing value as the last period

• STEP 4 Find the closing inventory valuation

  • This is usually based on a percentage of inventory the business would like to hold

• STEP 5 Find the purchases for the month

  • Start with the production units
  • Subtract the opening inventory of materials
  • Add the closing inventory of materials

Worked Example Suits Ltd makes fitted suits. The following information is provided:

	January	February	March
Production in units	9 000	10 000	8 500

• Each unit of production requires 5kg of material with the cost per kg as $7
• Closing inventory for direct material will be based on 20% of production for the next month
• Closing inventory is 2 000 units in December
• Production is expected to be 9000 in April

Prepare the purchases budget for January, February and March

Answer

• Calculate the cost price for each unit

5kg × $7 = $35 per unit

• Calculate the production cost for each month

January = 9 000 × $35= $315 000

February = 10 000 × $35 = $350 000

March = 8 500 × $35 = $297 500

• Calculate the opening inventory for the first month

January = 2 000 units × $35 = $70 000

• Calculate the closing inventory for the first month

January = 10 000 units × 20% = 2 000 x $35 = $70 000

February = 8 500 units × 20% = 1 700 x $35 = $59 500

March = 9 000 units × 20% = 1 800 x $35 = $63 000

• The answer will be shown as the purchases budget:

	January $	February $	March $
Production	315 000	350 000	297 500
Less: Opening Inventory	(70 000)	(70 000)	(59 500)
Add: Closing Inventory	70 000	59 500	63 000
Purchase	315 000	339 500	301 000

Exam Hint When doing the sales, production and purchase budget, it would make it easier to do them in this order:

1. Sales
2. Production
3. Purchases