Chicago Furniture Company Produces Combination Desk And Chai

Chicago Furniture Company Produces Combination Desk And Chair Sets For

Chicago Furniture Company produces combination desk and chair sets for elementary schools in the Midwest. As the second quarter progresses, the controller needs to complete a budget for the third quarter. The sales department has provided a forecast for sales in units for the upcoming months: July (8,000), August (8,700), September (7,600), October (8,700), and November (8,800). To maintain Just-in-Time (JIT) delivery policies, the company requires that inventory at the end of each month equal 40% of the following month's forecasted sales. As of July 1st, inventory stands at 3,200 desk combos. Each desk combo requires 12 board feet of pine, which costs $0.70 per foot. To ensure sufficient inventory, the company maintains a policy that inventory must be equal to 30% of the next month’s production requirements. Using this data, discuss why preparing a sales forecast is an essential early step in creating a master budget and outline at least three benefits of preparing a formal budget.

Paper For Above instruction

Introduction

The process of preparing a master budget is integral to effective financial planning and management within a manufacturing company. Central to this process is the development of a sales forecast, which serves as the foundation for all subsequent budgeting activities. Accurate sales forecasting enables management to allocate resources efficiently, plan production schedules, and coordinate supply chain activities in accordance with anticipated demand. This paper explores the reasons why sales forecasting is among the earliest steps in the master budgeting process and highlights three significant benefits that a formal budget provides to an organization like Chicago Furniture Company.

The Significance of Sales Forecasting in Budget Preparation

Sales forecasting is crucial because it provides an estimate of future sales volume based on historical data, market trends, and other relevant factors. It enables management to anticipate revenue streams and project cash flows, which are vital for planning operating expenses and capital investments. In the context of Chicago Furniture Company, an accurate sales forecast informs decisions regarding raw material procurement, production scheduling, and inventory management.

One primary reason for its early placement in the budgeting process is that sales forecasts directly influence the sales revenue projections, which constitute the starting point for the entire budget structure. Without a reliable forecast, subsequent budgets—such as production, purchasing, and cash budgets—would be based on uncertain or arbitrary figures. This could result in overproduction or shortages, misallocation of resources, and ultimately, financial inefficiencies. For example, the forecasted sales for August (8,700 units) and September (7,600 units) determine how many desk and chair sets the company needs to produce in those months to meet demand while maintaining the necessary inventory levels.

Another reason is that sales forecasts help synchronize production with expected demand, especially when implementing JIT principles. By predicting how many units will be needed at each time point, management can schedule manufacturing activities to meet these requirements without excessive inventory buildup or stockouts. For Chicago Furniture, maintaining inventories equal to 40% of the next month’s sales ensures timely delivery to schools while minimizing storage costs.

Furthermore, sales forecasts facilitate coordination among various departments such as marketing, production, and finance. When the sales forecast is established early, each department can plan its activities accordingly, leading to more cohesive and efficient operations. For instance, the purchasing department can order raw materials, like pine boards, aligned with the forecasted production needs, avoiding delays or excess inventory.

Benefits of Preparing a Formal Budget

A formal budget serves as a comprehensive financial plan that consolidates various operational and financial activities into a coherent framework. It offers numerous benefits, three of which are particularly significant for a manufacturing company like Chicago Furniture:

1. Enhanced Financial Control:

   A formal budget establishes clear financial targets and guidelines, enabling management to monitor actual performance against projected figures. This facilitates timely identification of variances and corrective actions. For example, if actual raw material costs deviate from the budgeted amount, management can investigate and implement cost-saving measures. Such control helps prevent overspending and supports disciplined resource utilization.

2. Improved Decision-Making:

   Having a detailed budget provides a factual basis for strategic decisions. Management can evaluate different scenarios, such as increasing production capacity or adjusting inventory policies, based on projected revenues and costs. For Chicago Furniture, this could mean deciding whether to invest in additional machinery or negotiate better prices with suppliers. The budget acts as a roadmap, reducing uncertainty and enabling informed choices.

3. Facilitation of Performance Evaluation and Accountability:

   A budget serves as a benchmark for measuring actual performance. Comparing actual results with budgeted figures helps identify operational strengths and areas needing improvement. It also fosters accountability among managers and departments responsible for particular budget segments. For instance, the purchasing manager can be held accountable for raw material costs, while production managers can be evaluated based on efficiency in meeting the budgeted production levels.

Conclusion

In summary, the preparation of a sales forecast is a vital initial step in the master budgeting process because it provides essential input concerning expected sales volumes, revenues, and required production levels. Accurate forecasting enables seamless coordination of various operational components, supports effective inventory management, and enhances overall organizational efficiency. Additionally, a formal budget extends these advantages by offering control, supporting decision-making, and promoting accountability. For Chicago Furniture Company, integrating sales forecasting with comprehensive budgeting practices ensures accurate planning, optimal resource use, and sustained financial health.

References

• Drury, C. (2018). Management and Cost Accounting (10th ed.). Cengage Learning.
• Horngren, C. T., Sundem, G. L., Stratton, W. O., Burgstahler, D., & Schatzberg, J. (2018). Introduction to Management Accounting (16th ed.). Pearson.
• Kaplan, R. S., & Atkinson, A. A. (2015). Advanced Management Accounting (3rd ed.). Pearson.
• Shim, J. K., & Siegel, J. G. (2016). Budgeting and Financial Management in the Public Sector. John Wiley & Sons.
• Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2019). Financial & Managerial Accounting. Wiley.
• Anthony, R. N., & Govindarajan, V. (2018). Management Control Systems. McGraw-Hill Education.
• Banker, R. D., & Kauffman, R. J. (2018). Management Control and Information Technology. Routledge.
• Finkler, S. A., Kempe, K., & Bombardier, C. H. (2014). Financial Management for Public, Health, and Not-for-Profit Organizations. CQ Press.
• Harrison, W. T., & Hollenbeck, J. R. (2018). Managerial Accounting. Routledge.
• Garrison, R. H., Noreen, E. W., & Brewer, P. C. (2018). Managerial Accounting. McGraw-Hill Education.