Preparing the Sales Budget:

Operating Budget is the estimate of income and expenditures during a set period of time. The Operating Budget is consisting of “Sales Budget, Production Budget, Direct Materials and Direct Labors, Manufacturing Overhead Budget, Ending Finished Goods Inventory, Cost of Goods Sold and the Contribution Margins budgets.” These all small budgets lead the organizations management efforts to the development of massive cycle budget.

Introduction of Sales Budget:

                Sales Budget is the estimated revenue of an organization which they plan earn in a fiscal year. The Sales budget is consisting of the Units Sold in and price an organization earned over its sales activities in that period of time. The Sales are the main part of the organization annual profit.

                The Management always forecast the sales over the different trends like economic treads, seasonal trends, industrial and market trends. The projected sales can be representing as follows:

Projected Total Sales:    Projected Sales in Units    x   Selling price of the per Unit.

Projected Total Sales:   1450 Units sold in a period x $5.00 per unit price =    $7250.00 .    

      

Production Budget:

                Production Budget is the estimates of the production activities which mostly focused on the number of units plan to produce in a period of time. The Inventory levels in the warehouses or stores of the factories and businesses are based on this budget. The top leadership estimates the production budget on the basis of the demand and supply. The management decides that at the end of the period how much they need in the shape of ending inventory in the warehouses. In short the two main factors of production budget is the product of material and its conversion costs which is normally known a labor cost.The Production budget sample for example is as follows:

                Projected Sales in Units:

       +      Desire Ending Inventory:

                Total Needed:

-                    -               Beginning Inventory:

                Units estimates to be produce:

  

Direct Materials Budget:

                It estimates over the basis of the units and input price for these units. When a business organization making many product they always prefer those products that are interrelated to each other that reduce their material handling cost and make their efficiency well to achieve the affordable material cost in production. The Direct material budgets is consist of the unit’s estimates to produce in a period the raw material cost and the budgeted cost for these materials and add the resultant with the ending inventory and minimize the beginning inventory. After all this activity we can get the total cost for the estimated materials units.

Direct Labors:

                It estimates over the basis of wages, rates, and different number of amounts which the skill labor uses to convert the raw material in the finished goods. The Calculation of the direct labor is as follows:

Projected total direct labor per hours:    Units to be produced x  Direct Labor hours per unit

Total projected direct labor cost:  Projected total direct labor per hours x direct labor cost per hour

Manufacturing Overhead Budget:

                The manufacturing overhead budget estimates over the mixed cost which is based overt he fixed and variable over heads. Like we can say that the variable over head consist of indirect materials, some indirect labor costs and variable spending form the factory  and same like it the fixed overhead cost are depending upon the taxes, fees, rents, insurance and depreciation costs.

Ending Finished Goods Inventory Budget:

                The Ending Finished goods inventory budgets are consist over Direct Materials, Direct Labors, Variable Overheads, and Fixed over heads. The resultants of these all is known as finished goods inventory budget.

Cost of Goods Sold Budgets:

                When we combine the beginning finished goods inventory and add all types of new cost of goods manufactured and subtract the ending finished goods inventory form the calculation the resultant is Budgeted Cost of Goods Sold. Further we can abstract the Gross profit or loss margin form this which can be abstract as follows:

                                Gross Margin:   Sales - Cost of Goods Sold

Contribution Margin:

                When we subtract the variable based cost of goods sold form the total number of sales the result is Contribution margin. It is more useful for those management accountants who are using the GAAP principles for accounting record purposes. At this point the breakeven point can be abstracted. The breakeven point is the point at which the organization achieves the level at which its spending costs over production equalize to the points or return from its overall operations. It will be representing as follows:

                Breakevens point:           Total fixed Cost / Contribution margin per unit

Manufacturing and Non-Manufacturing Budgets:

                These both estimate the spending over the manufacturing and non-manufacturing activities. The Manufacturing activities like the spending over direct materials and fixed overheads and like many mores and the non-manufacturing budgets are consist of those activities like R&D costs, marketing, designing, distribution, CSR operations and other administrative operations.

Conclusion:

                Now at this level we can define the operating budget easily. It is the estimates  and variance of  overall spending and sales. We can show the operating budget as follows:

                Sales

Add:      Cost of Goods Sold:

                Gross margin:

Less:      Non-Manufacturing Costs:

                Operating Budget: