Crimson Company, a producer of aftermarket automobile products, has just completed its master budget process for the next fiscal year. With three weeks remaining before the new period begins, you are reviewing the budget spreadsheets to make sure they contain the most up-to-date information.
I.The initial estimate of unit sales of leather Miata seat covers was too optimistic. Updated forecasts from the Marketing Department indicate that units sold will be 40% lower than previously anticipated. Discuss how the budgeted balance sheet is affected by the updated sales forecast.
Balance Sheet Account Direction of Change (increase/decrease) Reason (briefly)
II. The master budget does not reflect the recent efficiency training that production-line workers received. Crimson anticipates that the new cutting methods the workers learned will reduce the scrap waste of leather, resulting in a 10% decrease in the usage of this direct material. Discuss how the cash budget is affected by the expected scrap reduction.
Cash Budget Item Direction of Change (increase/decrease)
1 - As the units sold are lower than anticipated. The total sales value will reduce by 40% provided the price of Miata seat covers is taken as constant for the budget period. Lower sales amount will result in lower profits which in turn will reduce the expected retained earnings in the budgeted balance sheet, thereby reduce the balance sheet totals.
2 - 10% decrease in usage ...
The solution provides insight to how changes in sales forecast affects balance sheet items.