Forecasts and Budgets 183Exhibit 6.5 is a simplified budget for C&G’s Gift Shop. It is prepared on a
monthly basis. The number preceding each heading refers to the applicable
line in the budget.
Sales Budget (1–3)
The sales budget, or revenue budget, is the first to be prepared. It is usually the
most important budget because so many other budgets are directly related to
sales and therefore largely derived from the sales budget. Inventory budgets,
production budgets, personnel budgets, marketing budgets, administrative
budgets, and other budget areas are all affected significantly by the overall
sales volume expected.
For C&G’s Gift Shop, expected sales in units are reported on line 1. Note
that the business is highly seasonal, with most of the sales and profits realized
during the months of November and December. To keep the budget simple, we
assume an average sales price of $100 per unit. In practice, the business would
forecast unit sales by individual product lines.
Budgeted Cost of Goods Sold (4)
C&G assumes a cost of goods sold of 65% of sales revenues. This results in a
gross profit of 35%. For a retailing company, cost of goods sold represents the
purchase cost of inventories sold during the period. It is computed as
where all inventories and purchases are computed at the purchase price to the
company.
Cost of Goods Sold Beginning Inventory Purchases during the Period
Ending Inventory=+
−EXHIBIT 6.4 A manufacturing firm’s
master budget.
Operating Budget
Sales budget
Budget of ending inventor ies
Production budget
Materials budget
Direct labor budget
Manufacturing overhead budget
Administrative expense budget
Budgeted non-operating items
Budgeted net income
Financial Budget
Capital expenditure budget
Budgeted statement of financial position (balance sheet)
Budgeted statement of cash f lows