Question

How do you calculate: Sales budget, schedules of expected cash flows, Production budget, Materials budget, Direct labor budget & Cash budget?

Answer 1

SALES BUDGET :- The basic calculation in the sales budget is to itemize the number of unit sales expected in one row, and then list the average expected unit price in the next row, with the total revenues appearing in a third row. The unit price may be adjusted for marketing promotions. If any sales discounts or sales returns are anticipated, these items are also listed in the sales budget.

SCHEDULES OF EXPECTED CASH FLOWS :- The calculation of expected cash collections is based on the total sales figure obtained from sales budget. The management estimates the proportion in which sales are expected to be collected in the current and following periods. This is used to determine how much sales are expected to be collected during a period.

PRODUCTION BUDGET :- The basic calculation used by the production budget is:

+ Forecasted unit sales
+ Planned finished goods ending inventory balance
= Total production required

- Beginning finished goods inventory
= Products to be manufactured

MATERIALS BUDGET:- The basic calculation used by the direct materials budget is:

+ Raw materials required for production
+ Planned ending inventory balance
= Total raw materials required

- Beginning raw materials inventory
= Raw materials to be purchased

DIRECT LABOUR BUDGET:-The direct labor budget is typically presented in either a monthly or quarterly format. The basic calculation used by the budget is to import the number of units of production from the production budget and to multiply this by the standard number of labor hours for each unit. This yields a subtotal of the direct labor hours needed to meet the production target. You can also add more hours to account for production inefficiencies, which increases the amount of direct labor hours. Then multiply the total number of direct labor hours by the fully burdened direct labor cost per hour to arrive at the total cost of direct labor.

CASH BUDGET:-

Cash budget is a financial budget prepared to calculate the budgeted cash inflows and outflows during a period and the budgeted cash balance at the end of the period. Cash budget helps the managers to determine any excessive idle cash or cash shortage that is expected during the period. Such information helps the managers to plan accordingly. For example if any cash shortage in expected in future, the managers plan to change the credit policy or to borrow money and if excessive idle cash is expected, they plan to invest it or to use it for the repayment of loan.

All businesses need to maintain a safe level of cash to enable them to carry on business activities. The managers of a business need to determine that safe level. The cash budget is then prepared by taking into consideration, that safe level of cash. Thus, if a cash shortage is expected during a period, a plan is made to borrow cash.