Budgeting 21-4 Turney Company Produces And Sells Automobiles

Budgetinge21 4 Turney Company Produces And Sells Automobile Batteries

Turney Company produces and sells automobile batteries, specifically the heavy-duty HD-240 model. The company has provided a sales forecast for 2017, along with inventory policies and sales expectations for the first quarter of 2018. The goal is to develop a detailed budget based on these projections, accounting for beginning inventory, desired ending inventory, and sales growth.

Paper For Above instruction

Budgeting is an essential component of effective financial planning for manufacturing companies, especially those producing specialized products such as automobile batteries. Turney Company, which produces the heavy-duty HD-240 batteries, demonstrates a typical example of how companies forecast sales, manage inventory levels, and prepare budgets to ensure smooth operations and financial stability.

For the fiscal year 2017, Turney Company has provided quarterly sales forecasts which serve as the foundation for its budgeting process. According to the forecast, the sales quantities (in units) for each quarter are as follows: Quarter 1 (Q1), Quarter 2 (Q2), Quarter 3 (Q3), and Quarter 4 (Q4). The beginning inventory on January 1, 2017, stood at 2,000 units. The company follows a policy of maintaining an ending inventory each quarter equal to 40% of the subsequent quarter's sales, which helps in balancing inventory costs and customer service levels.

Additionally, management has projected that sales in the first quarter of 2018 will be 25% higher than sales in the same quarter of 2017. This forecast not only indicates growth expectations but also influences the production planning needed to meet increased demand while ensuring adequate inventory levels. The budgeting process must incorporate these projected sales increases, forecasted inventory needs, and the company's overall production capacity.

To develop a comprehensive budget, the first step involves calculating the sales units for each quarter based on the forecast data provided. Next, the company calculates the desired ending inventory for each quarter using the policy of 40% of the subsequent quarter's sales. The beginning inventory for each quarter is then established based on the previous quarter's ending inventory. This approach ensures continuity and alignment with inventory management policies.

For example, if the forecast indicates a sales volume of x units in Q1, the ending inventory for Q1 will be 40% of Q2’s sales forecast, and the beginning inventory will be the ending inventory of Q1. The process continues similarly for all subsequent quarters, enabling the company to determine the production quantities required each quarter to meet both sales demand and inventory policies.

Furthermore, the budget must account for the projected sales increase in Q1 2018, impacting production schedules and inventory levels accordingly. If sales in Q1 2018 are expected to be 25% higher than Q1 2017, then the forecasted units for Q1 2018 will need to be adjusted, and production planning should reflect this increase. This projection helps ensure the company can meet customer demand while maintaining optimal inventory levels.

Overall, effective budgeting in companies like Turney involves detailed sales forecasting, understanding inventory policies, and strategic planning to balance production with anticipated demand. Proper execution of these budgeting principles can lead to improved cash flows, minimized carrying costs, and heightened customer satisfaction by avoiding stockouts.

References

• Hansen, D. R., & Mowen, M. M. (2014). Cost Management: A Strategic Emphasis. Cengage Learning.
• Drury, C. (2013). Management and Cost Accounting. Springer.
• Horngren, C. T., Datar, S. M., & Rajan, M. (2015). Cost Accounting: A Managerial Emphasis. Pearson.
• Garrison, R. H., Noreen, E. W., & Brewer, P. C. (2018). Managerial Accounting. McGraw-Hill Education.
• Wild, J. J., Subramanyam, K. R., & Halsey, R. F. (2014). Financial Statement Analysis. McGraw-Hill Education.
• Shim, J. K., & Siegel, J. G. (2014). Budgeting and Financial Management. Barron's Educational Series.
• Warren, C. S., Reeve, J. M., & Duchac, J. (2018). Financial & Managerial Accounting. Cengage Learning.
• Anthony, R. N., & Govindarajan, V. (2014). Management Control Systems. McGraw-Hill Education.
• Kaplan, R. S., & Cooper, R. (2013). Cost & Effect: Using Integrated Cost Systems to Drive Profitability and Performance. Harvard Business Review Press.
• Horngren, C. T., et al. (2012). Introduction to Management Accounting. Pearson.