214 ACCOUNTING FOR MANAGERS
In Table 14.4, for example, the inventory required at the end of February
(£48,000) is the cost of sales for March (£34,000) plus half the cost of sales for April
(£14,000). In order to budget for the inventory for May and June, SSC needs to
estimate its sales for July and August. As this is the peak selling time, the sales
are estimated at £90,000 and £85,000 respectively. The cost of sales (based on
40%) is therefore £36,000 for July and £34,000 for August. Using these figures, the
inventory required at the end of June (£53,000) is equal to the cost of sales for July
(£36,000) and half the cost of sales for August (£17,000).
SSC also needs to know its inventory on 1 January, which is £45,000. Purchases
can be calculated as:
inventory required at end of month−inventory at beginning of month
=increase (or decrease) in inventory
plus the cost of sales for the current month (which need to be replaced)Table 14.4 shows the calculation of total purchases. However, it can also be shown
in the Profit and Loss report format introduced in previous chapters. This format
is shown in Table 14.5.
The second example is the construction of the production budget for a manu-
facturing business.
Manufacturing budget example: Telcon Manufacturing............
Telcon is a manufacturer. Its budget is shown in Table 14.6.
Telcon estimates its sales for July and August as 1,400 units per month. Its
production budget is based on needing to maintain one month’s stock of finished
goods, i.e. the cost of sales for the following month. Its finished goods inventory
at the beginning of January is 1,000 units. Table 14.7 shows that the production
required of £56,250 is greater than the cost of sales of £53,250 because of the need
to produce an additional 400 units at a variable cost of £7.50, i.e. an increase in
inventory of £3,000.
However, in order to produce the finished goods, Telcon must also ensure
that it has purchased sufficient raw materials. Once again, it wishes to have one
month’s stock of raw materials (2 kg of the materials are required for each unit of
Table 14.5 Sports Stores Co-operative closing stock
Jan Feb Mar Apr May Jun
Opening stock 45 49 48 41 44 54
Plus purchases 34 31 27 31 36 35
Less cost of sales − 30 − 32 − 34 − 28 − 26 − 36Closing stock 49 48 41 44 54 53