Taking into account an increased emphasis on marketing, Barney and Co. predicts a unit sales increase of 20% in the coming year. The sales team agrees provided the price per unit remains at $45. Therefore, Barney and Co. will budget sales by the quarter by increasing prior year sales by 20% [ CITATION Jam16 l 1033 ]. .
Production budget.
The production budget calculates the number of units of products that must be manufactured, and is derived from a combination of the sales forecast and the planned amount of finished goods inventory to have on hand (usually as safety stock to cover for unexpected increases in demand). The production budget is typically prepared for a "push" manufacturing system, as is used in material requirements planning environment [ CITATION Pro16 l 1033 ]. Once the sales budget has been prepared, the production budget can be developed. In deciding how much to produce, managers must take into account how much they expect to sell, how much is in beginning inventory, and how much they want in ending inventory [ CITATION Jam16 l 1033 ].
Barney and Co would like their ending inventory of finished units to equal 10% of the next quarter. In the first quarter, managerial accountants at Barney and Co. plan that 21,600 units will be sold, and 2,500 units are needed for ending inventory. Hence, a total of 24,100 units is required. If Barney and Co. has a total of 2,100 units in beginning inventory, only 22,000 units must be produced [ CITATION Jam16 l 1033 ]. .
Direct Materials Budget.
The direct materials budget calculates the materials that must be purchased, by period, to fulfill the requirements of the production budget. It is typically presented in either a monthly or quarterly format in the annual budget. In a business that sells products, this budget may contain a majority of all costs incurred by the company, and so should be compiled with considerable care. Otherwise, the result may erroneously indicate excessively high or low cash requirements to fund materials purchases [ CITATION Mat16 l 1033 ].
