A controller builds next year's profit plan from one number (forecast unit sales) and walks it through seven supporting schedules before the cash budget closes the loop. Miss the production-inventory tie or the receivables lag and the pro forma cash balance collapses.
The sales budget is built first and anchors every other budget. Production needs unit demand, materials need production volume, and cash receipts need revenue. Components: forecast units by product, selling price per unit, total revenue, broken down by month or quarter and by territory.
KEY: A sales forecast weighs prior-period sales, current backlog, market research, economic indicators, competitor pricing, planned price changes, advertising plans, productive capacity, and seasonality. No single factor is sufficient.
Production is driven by sales plus the finished goods inventory policy.
Other factors: capacity, workforce availability, equipment downtime, safety stock, and seasonal smoothing (level vs. chase production).
Production drives RM usage; procurement policy then drives purchases.
Common mistakes
- Forgetting to subtract beginning inventory. Production = sales + ending FG minus beginning FG, not plus. Same trap on materials purchases.
- Treating depreciation as a cash outflow. Depreciation belongs on the pro forma IS and in the overhead allocation, but is non-cash. Strip it before computing disbursements.
- Putting variable selling expense above gross profit. GAAP keeps it below, but for contribution margin analysis it is part of variable cost and reduces CM per unit.
Bottom line
- Sales budget is the anchor: production, materials, labor, overhead, S&A, and cash all derive from forecast units
- Production = sales + ending FG − beginning FG; materials follow the same rollforward at the RM level
- Direct labor cost = units × hours per unit × wage rate; the plan is feasible only when required hours fit within available capacity
- Overhead splits into fixed and variable using high-low, regression, or account analysis
Exam shortcut
When a question gives a sales forecast and an inventory policy stated as a percentage of next period's sales, compute next period's ending inventory first, then plug into production = sales + ending − beginning. The trap reverses the sign on beginning inventory. When a cash budget question lists collection percentages summing to less than 100, the gap is bad debt write-offs. Do not gross up.
The full lesson (about 1,606 words, 11 min read) adds 2 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
- 1B5
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