Budgeting in merchandising companiesBudget preparation for merchandising companies and service companies is similar to budgeting for manufacturing companies. A service or merchandising company will not have a production budget or direct material budget and may not have a direct labor or overhead budget. The largest difference is since we do not have a production or materials purchase budget, we still need to know how much inventory we need to buy for a merchandiser. The merchandise purchases budget is similar to the production budget. The purchases budget can be done in units or in total dollars. Typically, the purchases budget is done in dollars and will use a cost of goods sold percentage to determine the cost of inventory sales. Remember, cost of goods sold is literally the cost of the inventory we are now selling and should be less than what we can sell it. This section discusses budgeting in merchandising companies. Throughout this chapter, we have focused on budgeting in a manufacturing company. Suppose managers in a retail merchandising business, such as a dress shop or a furniture store, prepare a budget. In this case, the company prepares a purchases budget instead of a production budget. To compute the purchases for each quarter, management must estimate the cost of the goods to be sold during the quarter and the inventory required at the end of the quarter. Suppose Strobel Furniture Company prepared a sales budget showing sales of $30,000 in the first quarter, $80,000 in the second quarter, $50,000 in the third quarter and $40,000 in the fourth quarter. Assume the company maintains sufficient inventory to cover one-half of the next quarter’s sales. Cost of goods sold is 55% of sales. The ending merchandise inventory this year is expected to be $11,000. The purchases budget can now be prepared. We need the following information:
Strobel’s merchandise inventory budget would look like:
Important items to now:
Strobel can now use the information in its purchases budget to prepare the cost of goods sold section of the budgeted income statement, to prepare cash disbursements schedules, and to prepare the inventory and accounts payable amounts in the financial budget. How do you calculate merchandise purchases budget?Inventory to be purchased equals the budgeted ending inventory plus the budgeted cost of sales for the period minus the budgeted beginning inventory. Like most other budgets, the merchandise purchases budget relies on the estimated sales for the period and can't be made until the sales budget is finished.
How do you calculate the total cost of merchandise purchased for the year?The cost of goods purchased is the net cost of merchandise acquired. The calculation is to add freight in to the initial purchase cost and then subtract purchase allowances, purchase discounts, and purchase returns.
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