Budgeting

 Budgeting is an important activity to every business enterprise. It is usually a financial map preparing the business on how to raise the revenue required to run the business and how to put it to use. Introduction of liabilities in the business may change the business activities and budgeting to accommodate the financial loop created and help pay the debt.  Although budgeting doesn’t guarantee success, it usually helps to avoid failure. A company named Barnes & Co. has its sales decreased by 20% in 2012. Recently, the company acquired new equipment to enhance productivity but this increased the expenses used to service the loan equal to 5% of the company’s annual expenditure. The paper will present three potential budgeting solutions; the direct materials budget, the production budget and sales budget in response to a decrease in sales Barnes & Co. is experiencing.

Sales Budgeting

To increase sales, Barnes and Co. needs to introduce new methods that will increase its trades to guarantee higher returns. The company needs to adopt evolutional and better sales practices. The approaches should provide remedy to market challenges and the best ways for the company to compete favorably in the market. According to Van Helden, in structuring the overall budget for any company, the first important step is developing a sales budget (van Helden & Alsem 2016). The company cannot give the provision of any other part of its financial projections without giving the sales budget.

Barnes and Co. want to increase their sales by 20% in the next trading year. To accomplish this, the company need to retain its price of $10 per unit. It needs also to ensure an increased in the sale. It will budget its sales for each annual quarter by increasing the sales units by 20%. Table 1 represents the sale budget for Barnes and Co.

Sales Budget
Year Ending December 31, 2014
	Quarter1	Quarter2	Quarter3	Quarter4
Annual Sales	20000	50000	30000	25000
Sales projection 0n 20%	24000	60000	36000	30000
Unit price	$10	$10	$10	$10
Sales Revenue Budget	240000	600000	360000	300000

Table 1: sales Budget for Barnes & Co. Company

Developing sales budget helps the company to project it’s spending as well the expected sales quotas and the overall company goals. Some companies exercise the freedom of sale department by providing discretionary amounts to managers and sale representative to implement sales budget. Creating a sales budget will help compare the overheads and the revenue collected. A projection will show the increase a company will get by either expanding its operation or collapsing it.

Production Budget

To have a complete product for sale, the product need manufacturing or production. There are a lot of expenses involved in the process of production. A production cost budget helps a company to track it operational and development cost used in production based on the output quantity. It entails the budget used in the production of the specific number of units to meet the company's inventory. To prepare a comprehensive production budget, the inventory and the company's sales target are the key factors to consider.

After completion of the sales budget, Barnes & Co can be prepare the production budget. The manager is involved in the decision of how many units to produce and take to account what is expected for sale, inventory and how much they require to complete the inventory projection. It will the present complete amount of units to be produced in each quarter.

Complete Number of Units to be Produced = Expected Units to be Sold + Projected Completed Units Inventory- Original Completed Units Inventory (Irfanullah, n.d a). Table 2 represents the production budget for the Barnes & Co. Company.

Production Budget
Year Ending December 31, 2014
	Quarter1	Quarter2	Quarter3	Quarter4	Annual
Unit Sales	24000	60000	36000	30000	125000
ADD Projected Inventory In Units	2300	3500	2200	2500	2500
Total Needed	26300	63500	38200	32500	127500
LESS Beginning Inventory In Unit	2100	2300	2500	2200	2100
Unit To Be Produced	24200	61000	35700	30300	125400

Table 2: production Budget for Barnes & Co.

Some of the factors that need consideration when developing a production budget are whether the company outsources the manufacturing services or it does it in its own premises which would change the total production budget. The cost of the third party needs to be included to have a comprehensive production budget. Some of the estimates in the production budget may change upon changes in the external environment of the company. Increase in cost of production and scarcity of some factors will lead to changes in the budget. Another shift to decreased cost may be as a result of inclusion of alternative cheaper raw material or a new discovery of the source of raw material.

Direct Materials Budget

After the production budget is prepared, it’s possible to prepare direct material budget. It computes the cost of materials to be procured in a specified duration so that the production budget necessities are achieved. If a company manufacture the same type of goods, it will buy the same raw material over and over again in the beginning of a trading period. The direct material budget shows the amount to be purchased in relation to the expected production in the period.

In the beginning of each trading period, Barnes & Co. management want to have 10% of the next trading period’s direct materials in the inventory.  Direct materials purchases budgets represent starting and closing direct material inventory, usually the total sum of direct material used to produce goods, the total sum of direct material to be acquired and its price through a precise time frame (Irfanullah, n.d b).

Direct Material Budget
Year Ending December 31, 2014
	Quarter1	Quarter2	Quarter3	Quarter4	Year
Units to be Produced	24200	61000	35700	30300	12500
Cost per Unit	$6	$6	$6	$6	$6
Cost of Part of Production	145200	36600	214200	181800	750000
ADD Inventory Parts	14880	13740	13320	14700	14700
Total Needed	160080	379740	227520	196500	764700
LESS Beginning Inventory	12840	14880	13740	13320	12840
Cost of Purchase	147240	364860	213780	183180	751700

In conclusion, the process of budgeting is very important in business enterprise. Although it may seem complex, it gives the company the plan on how it can acquire revenue, the amount required and possible allocation to have maximum utilization of the available resources. A plan on how to acquire finances and put it to use will help Barnes and Co. to organize their available resource to be able to meet their monetary expenses. The direct material shows the total cost of purchases used in production which is borrowed from the production budget. Production budget summarizes the cost of producing the units specified. The sales budget is used to plan the units to be sold to maximize profit from the available factors of production. The three budget can help the company solve it budgeting problems.

References

Infanullah, J. (n.d a). Production Budget. Retrieved from https://accountingexplained.com/managerial/master-budget/production

Infanullah, J. (n.d b). Production Budget. Retrieved from https://accountingexplained.com/managerial/master-budget/direct-material-purchases

Van Helden, J., & Alsem, K. J. (2016). The Delicate Interface between Management Accounting and Marketing Management Journal of Accounting & Marketing.