However, history rarely repeats itself, so the projected sales level must be adjusted for events that could deviate from the observed historical trend. Econometric models incorporate not only past sales data, but also other factors that affect sales. To forecast sales, in addition to the factors used in the analysis of
KERRY INDUSTRIAL COMPANY Sales Budget for the Quarter Ending June 30, 2007
trends, a company could use an econometric model that includes both national and regional economic indicators, unemployment rates, consumer confidence indices, and age group distributions.10 Among the advantages of using econometric models, it is possible to mention objectivity, verifiability, explicit reliability measures and the fact that more extensive relevant factors are included. In recent years, the use of econometric models has become increasingly common, in part because more powerful and inexpensive computers and easy-to-use software are available today. However, no model, no matter how complete or elaborate, can replace human judgment. A good forecast is usually the result of combining experienced judgment with the use of excellent forecasting models. Kerry Industrial Company’s sales budget for the first quarter of fiscal 2007 is illustrated in Figure 8.5. After examining the sales forecast for the upcoming year, current year-to-date operating results, strategic goals, Long-term plans for the business and products, as well as budget guidelines, Kerry sets the sales levels displayed and the selling price at $ 30 per unit. Once this is done, prepare the production budget for the quarter.
Production budget Production budget A sales budget shows expected sales in units at their expected sales prices.
A production budget shows the planned production for a given period. This planned production depends on budgeted sales, desired ending inventory units for finished goods, and beginning inventory units for finished goods, as described in the following equation:
Selecting the desired ending inventory for a period requires striking a balance between opposing goals. Insufficient inventory leads to lost sales; however, maintaining excessive inventory is very costly. An important factor that determines the optimal level of inventories is how quickly the company adjusts its supply according to fluctuations in demand for its product.