Question

Assignment Details

Chicago Furniture Company produces combination desk and chair sets for the elementary schools in the Midwest. As the second quarter is progressing it is important for the controller to complete a budget for the third quarter. The sales department manager has provided the following forecast.

July	8,000 desk combos
August	8,700 desk combos
September	7,600 desk combos
October	8,700 desk combos
November	8,800 desk combos

• In order to ensure Just-in-Time (JIT) deliveries are maintained in accordance with the needs of the schools Chicago Furniture Company has a standing policy that the inventory at the end of each month must be equal to 40% of the following month’s forecasted sales. On July 1st there will be 3,200 desk combos in inventory.
• The building of each desk combo requires 12 board feet of pine planks which cost $0.70 per foot. In order to maintain proper inventory for building the desk combos the department must have 30% of the next month’s production requirements.

Using the information you developed in Submission Lesson #1, write 3-4 pages discussing the following:

• Why is the preparation of a sales forecast one of the earliest steps in preparing a master budget?
• Explain at least three ways a company can benefit from preparing a formal budget.

Answer 1

Preparation of a sales forecast is one of the earliest steps in preparing a master budget because sales forecasting is most important process in any company among other processes. Various parts of the business are tied with the sales . The foremost impact of sales forecasting is on the financial planning of the company i.e. projections impact stock prices and provide ideas about how managers run the company on the basis of investment they will make.

The sales forecast in master budget impact that how company creates and manages its sale force.. It also helps in deciding how to create territories , how to measure performance . Various other departments of the company rely on accurate sales budget. For Example: operation department will take decision on the basis of sales forecasting . Manufacturing decisions also depends on accurate sales forecasting. Sales forecasting is equally important even in service sector to decide how many employees they need each day. Future is uncertain so that sales forecast help the manager in ever competitive environment to cope with rapid changes.

Therefore we can say that sales forecasting help the firm in meeting the changes effectively and efficiently and also help in achieving their objectives or goals . Thus ,  preparation of a sales forecast is one of the earliest steps in preparing a master budget.

Following are the three ways a company can benefit from preparing a formal budget:

(1) Budgeting is always helpful since it helps you to track revenue and expenses and manage cash flow of the business organisations.

(2) A formal  budget helps an organisation to adjust spending, increase marketing to increase  sales, react to an unexpected decrease  in revenues and otherwise operate the  company by using the real-time data to keep it on track.

(3)  Budgeting motivates managers and employees by providing useful yardsticks for evaluating performance. The budgeting process can have a good motivational impact by involving managers in the budgeting process and by providing incentives to managers to strive for and achieve the business’s goals and objectives.

(4) Budgets provide useful information for superiors to evaluate the performance of managers and can be used to reward good results. For example, budgets supply baseline financial information for incentive compensation plans. And the profit plan (budget) for the year can be used to award year-end bonuses according to whether designated goals were achieved.

Therefore we can say that a company can enjoy  benefit from preparing a formal budget for their operations.

In given case also  sales department manager has provided the forecast which ensures to fulfill demand within time even if company follows JIT (Just in time) method of production.