Question

Valquez Manufacturing Company combines its operating expenses for budget purposes in a selling and administrative expense budget. For the first quarter of 2008, the following data are developed:

     

Sales:                                                                20,000 units

Unit selling price:                                                       RM35

Variable costs per RM of sales:

            Sales commissions                                                 6%

            Delivery expense                                                   2%

            Advertising                                                            4%

Fixed costs per quarter:

            Sales salaries                                             RM24,000

            Office salaries                                                  17,000

            Depreciation                                                      6,000

            Insurance                                                            2,000

            Utilities                                                              1,000

1. Prepare a selling and administrative expense budget for the first quarter of 2008.

2. Discuss 3 rationale behind your budgets that you have prepared above.

Answer 1

Based on the information available in the question, we can prepare the Sales and administrative expenses budget as follows:-

i.) Budget:-

Particulars	Amount
Expected sales(in units)	20,000
Unit selling price	35
Expected sales	700,000
Budgeted Variable cost per RM of sales:-
Sales Commissions	42,000
Delivery expense	14,000
Advertising	28,000
Budgeted Variable expense	84,000
Budgeted Fixed expenses:-
Sales salaries	24,000
Office salaries	17,000
Depreciation	6,000
Insurance	2,000
Utilities	1,000
Budgeted Fixed expenses	50,000
Total Budgeted selling and administrative expenses	134,000

ii.) The rationale behind the budgets:-

a.) The selling administrative expenses Budget gies an overview about how many units of the product the company is expected to sell. It also gives information on the variable Cost per unit, fixed expenses for the period , etc.

By planning for the number of sales units through the sales budget, a manager can plan the purchase of raw materials and can allocate the necessary labor that is required for production. Similarly, by calculating the variable costs within the Sales and Administrative expenses budget.

The budget also involves planned operating expenses that includes fixed expenses related to the business. This gives the manager an overview on the expenses that are supposed to be incurred by the business and the manager may plan effectively to reduce such expenses in order to maximise profit. Using a flexible sales and administrative expenses budget, a manager may prepare the sales and administrative expense budget at various levels of activities also. Note that :- Only variable costs would be variable within a Flexible budget.

Please let me know if you have any questions via comments and all the best :)