Ch. 6 Budgets
6.2 Operating Budget: Sales
Learning Objectives
After finishing this section, students will be able to:
- Forecast units sold to create all components of the sales budget.
In life, budgets are based on how much you bring home in your paycheck. In a company, budgets are based on how much you plan to sell. Without this information, you do not know how much money you can spend.
Sales Budget
The sales budget details the expected sales in units and the sales price for the budget period. The expected sales for the period will be determined by working with the sales manager to create a projected forecast. By nature, sales managers want to create high goals for their team. It is important for the sales manager to understand that a sales budget and sales goals are different. A sales budget needs to be met to provide money for the company. A sales goal needs to be set to make sure the sales team is reaching its full potential.
Sales price will not be given in real life. You will need to determine this by the knowledge you learned in the last chapter. Remember the three costs that go into making a product are direct materials, direct labor, and manufacturing overhead.
For example, Big Bad Bikes used information from competitor sales, its marketing department, and industry trends to estimate the number of units that will be sold in each quarter of the coming year. The number of units is multiplied by the sales price to determine the sales by quarter. The sales price increases between Quarters 3 and 4, so the Year Total will need to be a horizontal formula rather than a vertical formula.
| – | Quarter 1 | Quarter 2 | Quarter 3 | Quarter 4 | Total |
|---|---|---|---|---|---|
| Budget Sales (Units) | 1,000 | 1,000 | 1,500 | 2,500 | 6,000 |
| Sales Price ($) | $70 | $70 | $75 | $75 | – |
| Total Sales Revenue ($) | $70,000 | $70,000 | $112,500 | $187,500 | $440,000 |
The sales budget leads into the production budget to determine how many units must be produced each week, month, quarter, or year.
Cash Collections
The information from the sales budget is used to determine how much cash will be collected from sales made. The cash collections schedule includes all of the cash inflow expected to be received from customer sales, whether those customers pay at the same rate or even if they don’t pay at all. The cash collections schedule includes all the cash inflows expected to be received and does not include the amount of the receivables estimated as uncollectible.
To illustrate, let’s return to Big Bad Bikes. They believe cash collections for the trainer sales will be similar to the collections from their bicycle sales, so they will use that pattern to budget cash collections for the trainers. In the quarter of sales, 65% of that quarter’s sales will be collected. In the quarter after the sale, 30% will be collected. This leaves 5% of the sales considered uncollectible. Sales for the year were calculated in the sales budget.
Before we begin the calculations, a visual of the percentages is shown below.
| – | Quarter 1 | Quarter 2 | Quarter 3 | Quarter 4 |
|---|---|---|---|---|
| Quarter 1 Sales ($) | 65% | 30% | – | – |
| Quarter 2 Sales ($) | – | 65% | 30% | – |
| Quarter 3 Sales ($) | – | – | 65% | 30% |
| Quarter 4 Sales ($) | – | – | – | 65% |
As an example, Quarter 1 will be calculated by taking the sales from Quarter 1 ($70,000) times the collection percentage (65%) for $45,500. There were no sales in quarter 4 of the prior year, so 30% of zero sales shows the collections are $0. This amount will be collected in Quarter 1. Quarter 2 will be calculated by taking the sales from Quarter 2 ($70,000) times the collection percentage (30%) for $21,000. This amount will be collected in Quarter 2. This pattern will continue for each quarter.
| – | Quarter 1 | Quarter 2 | Quarter 3 | Quarter 4 | Total |
|---|---|---|---|---|---|
| Quarter 1 Sales ($) | $45,500 | $21,000 | – | – | $66,500 |
| Quarter 2 Sales ($) | – | 45,500 | $21,000 | – | 66,500 |
| Quarter 3 Sales ($) | – | – | 73,125 | $33,750 | 106,875 |
| Quarter 4 Sales ($) | – | – | – | 121,875 | 121,875 |
| Total Collections | $45,500 | $66,500 | $94,125 | $155,625 | $361,750 |
Accounts Receivable
The cash not collected from sales will appear on the balance sheet in accounts receivable. The beginning balance for accounts receivable is zero because it is the first year of business. The ending balance of accounts receivable is calculated by taking Quarter 1’s total sales revenue ($70,000) minus Quarter 1’s collections ($45,500). At the end of Quarter 1, customers will still owe us $24,500.
Quarter 1’s ending accounts receivable balance becomes Quarter 2’s beginning accounts receivable balance. Because not all of Quarter 1’s sales revenue was collected, we will need to factor that into Quarter 2’s calculation. Quarter 2’s ending accounts receivable balance is calculated by taking sales revenue from Quarter 1 and Quarter 2 minus collections for Quarter 1 and Quarter 2.
| – | Quarter 1 | Quarter 2 | Quarter 3 | Quarter 4 | Total |
|---|---|---|---|---|---|
| Accounts Rec., Beg Bal. ($) | $0 | $24,500 | $28,000 | $46,375 | $0 |
| Total Sales Revenue ($) | $70,000 | $70,000 | $112,500 | $187,500 | $440,000 |
| Total Collections ($) | $45,500 | $66,500 | $94,125 | $155,625 | $361,750 |
| Accounts Rec., End Bal. ($) | $24,500 | $28,000 | $46,375 | $78,250 | $78,250 |
Bad Debt Expense
The 5% considered uncollectible is bad debt expense and will go on the income statement under variable selling, general, and administrative expenses. The other side of this transaction will be on the balance sheet in allowance for doubtful accounts. Allowance for doubtful accounts will accumulate each quarter.
| – | Quarter 1 | Quarter 2 | Quarter 3 | Quarter 4 | Total |
|---|---|---|---|---|---|
| Total Sales Revenue ($) | $70,000 | $70,000 | $112,500 | $187,500 | $440,000 |
| 5% not collected | 5% | 5% | 5% | 5% | 5% |
| Bad Debt Expense | $3,500 | $3,500 | $5,625 | $9,375 | $22,000 |
| Partial Balance Sheet | ||
| Big Bad Bikes | ||
| For Quarter 4 | ||
| Current Assets | ||
| Accounts Receivable | $78,350 | |
| Allowance for Doubtful Accounts | 22,000 | |
| Total Current Assets | $56,350 | |
|---|---|---|
6.2a Example
Fitbands’ estimated sales are:
| Month | Amount |
|---|---|
| October | $131,982 |
| November | $195,723 |
| December | $249,283 |
| January | $124,298 |
| February | $129,284 |
| March | $127,373 |
If 60% of sales is collected in the month of sale, 25% is collected the month after the sale, and 10% is second month after the sale, what is the January balance of accounts receivable and allowance for doubtful accounts?
6.2a Homework
Fruit Tea’s data show the following information:
| – | Aug. | Sept. | Oct. | Nov. | Dec. |
|---|---|---|---|---|---|
| Estimated sales (Units) | 25,000 | 26,000 | 28,000 | 20,000 | 19,000 |
| Sales Price per Unit | $31.00 | $31.00 | $31.00 | $31.00 | $31.00 |
Instructions:
- Create a Sales Budget.
- If 60% of sales is collected in the month of sale, 25% is collected the month after the sale, and 10% is second month after the sale, what is the balances of accounts receivable and allowance for doubtful accounts for each month?
Licensing and Attribution:
Content on this page is adapted from the following openly licensed resource(s):
Principles of Accounting, Volume 2: Managerial Accounting by Mitchell Franklin, Patty Graybeal, and Dixon Cooper licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License
