The master budget for The Unknown Comic starts with a sales forecast, because that will determine how many units it will need to produce in order to meet the projected sales.
Issues that must be considered include
The sales team uses these data to determine the number of units that may be sold during the next period. This is a very important prediction, because it is used as the foundation for the entire budget. If the number is too high, then the company will have a significant ending inventory, meaning that the money spent has not generated revenue. If the number is too low, then the company will run out of inventory, and consumers will turn to the competition for products, meaning that the company will lose the opportunity to obtain that revenue.
In this example, you are preparing a very simple sales budget; the company sells only one product. It is very unlikely that a company would produce and sell only one product, of course, and multiple products sold at different prices would make the sales budget more complicated.
The company has gathered the following information related to the number of units it expects to sell each quarter next year and the estimated sales price per unit by quarter:
| Budget unit sales |
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| Quarter 1 | 1,800 |
| Quarter 2 | 1,200 |
| Quarter 3 | 1,500 |
| Quarter 4 | 2,000 |
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| Sales price per unit |
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| Quarter 1 | $30 |
| Quarter 2 | $30 |
| Quarter 3 | $30 |
| Quarter 4 | $30 |
Using the estimates, you will create the sales budget. Total sales in dollars is calculated by multiplying the budgeted number of units you expect the company to sell by the estimated sales price per unit.
| Sales Budget | Quarter 1 | Quarter 2 | Quarter 3 | Quarter 4 | Total for Year |
|---|---|---|---|---|---|
| Budgeted unit sales | 1,800 | 1,200 | 1,500 | 2,000 | 6,500 |
| Sales price per unit | $30 | $30 | $30 | $30 |
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| Total sales | $54,000 | $36,000 | $45,000 | $60,000 | $195,000 |
The sales budget provides the budgeted unit sales each quarter, which you will need to prepare the production budget. In addition, the total dollar sales for the year, $195,000, is needed for the budgeted income statement.
Once the sales budget is created, the production budget is developed based on the expected sales in units per quarter.