Accounting Business Reporting for Decision Making

392 Accounting: Business Reporting for Decision Making

After reviewing the budget documents, Nicholas is satisfied with the budgeted profit of $77 100. From the

budgeted statement of profit or loss the two major expenses for the entity are salaries, which represents 54 per

cent of the operating expenses; and the cost of leasing courts. Given the majority of the salaries cost is for per-

manent employees, Nicholas will have little opportunity to reduce the level of actual expenditure. Further, the

opportunity to renegotiate the lease of courts will not occur until 2018. It will be important for Nicholas to focus

the marketing and promotional efforts to generate the budgeted revenue, especially from the junior squads.

In the next section, we will look at the preparation of the operating budgets for a manufacturing entity.

You will notice the need to prepare additional budgets to consider the raw materials purchased and the

production costs required to convert the raw materials to a finished product.

Preparation of an operating budget for a

manufacturing entity

Anni Aryan is the accountant for Mountain Blue Bikes, a manufacturer of sturdy mountain bikes for

intermediate-level cyclists. The company’s managers are forecasting an increase in sales because of the

success of their current advertising campaign. They ask Anni to create a master budget for 2016, given

the forecasted sales increase.

To gather information needed for the budget, Anni first compiles relevant data about revenues, inven-

tories and production costs from last period’s accounting records. Next, she obtains information from

every department and meets with senior management to identify changes in sales volumes and prices,

production processes, manufacturing costs and support department costs.

Developing the sales budget

Anni prepares the sales budget first, which is derived from the sales forecast. The sales budget represents

management’s best estimate of sales revenue for the budget period. Obviously, the sales budget will have a

direct impact on profit. For example, if the sales forecast is too optimistic, the entity may purchase excessive

material inventories and/or overproduce the number of units required. This may lead to additional operating

costs due to the need to store more materials, not to mention the unnecessary increase in working capital

requirements. Also, if there is an excess of finished goods inventory, the product may need to be sold at

reduced prices. In contrast, a too-pessimistic forecast may result in insufficient materials and finished goods

inventory, which could lead to a loss of sales revenue and/or a loss of customer goodwill. The marketing

manager has forecast that 100 000 bikes will be sold in total at a price of $800 each, and due to the seasonal

nature of the product the sales will vary per quarter. Anni develops the sales budget detailed in illustrative

example 9.5 for Mountain Blue Bikes, based on the sales pattern identified by the marketing manager.

ILLUSTRATIVE EXAMPLE 9.5

Mountain Blue Bikes sales budget

Mountain Blue Bikes

Sales budget for the year ended 31 December 2016

Quarter 1 Quarter 2 Quarter 3 Quarter 4 Total

Expected sales (units)

Units selling price

30 000

× $800

20 000

× $800

10 000

× $800

40 000

× $800

100 000

× $800

Total sales revenue $ 24 000 000 $ 16 000 000 $8 000 000 $ 32 000 000 $ 80 000 000

Developing the production budget

Anni next develops the production budget. Production will be required to meet the need for both ending

finished goods inventory of the mountain bikes and sales for the period. However, not all of these units

will need to be manufactured as the entity has opening finished goods inventory to offset some of these