A Study On Sales And Finished Stock Budget Accounting Essay

Category: Accounting

A sales budget is a detailed schedule showing the expected sales for the budget period; typically, it is expressed in both dollars and units of production. An accurate sales budget is the key to the entire budgeting in some way. If the sales budget is sloppily done then the rest of the budgeting process is largely a waste of time.

It will help to determine how many units will have to be produced. Thus, the production budget is prepared after the sales budget. The production budget in turn is used to determine the budgets for manufacturing costs including the direct materials budget, the direct labor budget etc. These budgets are then combined with data from the sales budget and the selling and administrative expenses budget to determine the cash budget. In essence, the sales budget triggers a chain reaction that leads to the development of the other budgets. The selling and administrative expenses budget is both dependent on and a determinant of the sales budget.


After preparing sales budget, production budget, direct materials budget, direct labor budget, and manufacturing overhead budget the management has all the data needed to calculate unit product cost. This calculation is needed for two reasons: first, to determine cost of goods sold on the budgeted income statement; and second, to know what amount to put on the balance sheet inventory account for unsold units. The carrying cost of unsold units is calculated on the ending inventory finished goods budget.


The production budget is prepared after the sales budget. The production budget lists the number of units that must be produced during each budget period to meet sales needs and to provide for the desired ending inventory

Production requirements for a period are influenced by the desired level of ending inventory. Inventories should be carefully planned. Excessive inventories tie up funds and create storage problems.

MATERIAL USAGE BUDGET: Direct materials budget or materials budgeting details the materials that must be purchased to fulfill the production requirements and to provide for adequate inventories.

Ans1.The principal budget factor is the constraining factor which ultimately determines the level of activity planned. It is the area which cannot be increased to match the capacity of other areas. E.g a company may be able to sell 200,000 bottles of mineral water, but skilled labour available is only sufficient to produce 60,000. Labour therefore is the principal budget factor

It means that you don't have enough of something in order to do all you would like, it isÂ

a scarce resource which is in short supply . This could be because of shortage of material, staff hour, machine capacity even money.

Also known as Single Limiting Factor. A factor which places a ceiling on that which can be achieved by an organisation. For example, maximum production capacity or total sales opportunity. It is vital to identify this factor in order to proceed with the budgeting process."


The principal budget factor is the factor which limits the activities of an undertaking. It is important in the budgetary process because it must be determined first so that all other functional budgets may be related to it.

Performance Monitoring

There is a general acceptance of the idea that an organisation that monitors performance and rewards individuals for 'good performance' is more likely to encourage behaviour that is consistent with the objectives of the organisation. This involves the organisation 'transmitting signals' to its people as to what it deems desirable activities and outcomes in the workplace. This approach has resulted in such terms and activities as performance monitoring, performance related pay, payment by results, bonus systems. The reward for the achievement of desired outcomes could be money, promotion, job security, preferred work activities, alternative work environments. Unfortunately this is a very complex task and problems are likely to arise in a number of areas: It is very difficult in many work environments to measure individual performance - and if you resort to team performance, it is difficult to gauge the contribution from individual members.

It is difficult to ensure that individual targets are not inconsistent with other individuals or corporate objectives.

Current measured performance may discourage consideration of longer term issues that may have adverse repercussions.

Can a performance monitoring system comprehensively measure the key variables? For example, the desire to achieve greater volume/activity may be at the cost of quality that is more difficult to identify and appraise.

Measure fixation - concentrating on the measurement process and not on what needs to be achieved.

Misrepresentation - 'creative' responses that give a favourable view of activities.

Myopia - short sighted viewpoint with limited consideration to long term issues.

The problems highlighted above can be managed if the following points are considered:

Do not underestimate the scale of the task in designing a performance monitoring system.

Consider the expectations and likely responses of all the parties concerned - take a broad view.

Ensure that the people designing and operating the system have a comprehensive understanding of the organization's activities and the interrelationship between all of the stakeholders.

Ensure that all parties involved believe that they will be beneficiaries of the system.

Be prepared to reappraise and modify - it is unrealistic to believe that it can be perfected at the first attempt.

Transfer Pricing

Transfer pricing is primarily concerned with ensuring that semi-autonomous business units behave in a way that contributes towards the achievement of corporate and not merely divisional objectives. An effective transfer pricing system encourages divisional managers with autonomous decision making authority to pursue the interest of the corporation automatically whilst endeavouring to maximise the performance of their own business unit. Their decisions are made with self (divisional) interest as the driving factor, but coincidentally benefit the entire company. Effective transfer pricing systems consciously Endeavour to harness selfish divisional behavior to induce decisions that foster goal congruence. Problems can arise when inappropriate prices are set that result in 'wrong signals' being sent and non-optimal decisions being made:

Too high a price may result in unused capacity, lost contribution, reduced incentive to find external markets and unnecessary external sourcing from the buying division.§

Too low a price may result in 'excessive' internal trading and a loss of valuable external business.

To avoid these pitfalls the transfer pricing determination should consider:

The cost behavior (fixed and variable) of the different divisions.

The adequacy of the information available to the divisions concerning both internal and external prices.

Both the short and long run consequences of the prices set - internal and external markets and capacity levels.

The degree of autonomy given to the divisions.


Ans 3

1. Budgeting forces management to plan for the future-to develop an overall direction for the organization, foresee problems, and develop future policies.

2. Budgeting helps convey significant information about the resource capabilities of an organization, making better decisions possible. Example: A cash budget points out potential shortfalls.

3. It helps to set standards that can control the use of a company's resources and control and motivate employees.

4. Budgeting improves the communication of the plans of the organization to each employee. As it encourages coordination because the various areas and activities of the organization must all work together to achieve the stated objectives.