The purpose and nature of the budgeting process
A budget is a financial document used to project future income and expenses. For manufacturing, budget show the predict finance about the number and the estimate cost of all items which related in production such as: overhead cost, material, labor, revenue, expenses, assets, liabilities, etc. From these predictions, it can help company picturing out the future cost and profit. The budgeting process may be carried out by individuals or by companies to estimate whether the company can continue to operate with its projected income and expenses.
Purpose and advantages
Budgets play an important role in the manufacturing and ...view middle of the document...
Businesses rely on performance budgets to determine the best time to make bold, strategic moves. By constantly monitoring and reducing expenses, firms increase cash in corporate vaults and may use excess funds to expand their businesses.
Finally, budget helps motivating employee to improve their performance. Improved productivity is another advantage of performance budgets. These blueprints indicate to manufacturing supervisors where to look for inefficiencies and how to gradually, intelligently remedy production problems. Improved factory processes generally translate into better working conditions for production personnel, which, in turn, foster long-term productivity.
Stages in preparation of a budget
❖ Prepare a sales forecast, generally based on a combination of estimates by the sales staff, statistical analysis, and group executive judgment.
❖ Prepare a production budget based on the sales forecast (step 1).
Units to be produced = Budgeted sales + Desired ending inventory - Beginning inventory.
❖ Prepare a schedule of material usage and purchases.
a. Usage will depend on the level of production as budgeted (step 2).
b. Purchases in units = Usage + Desired ending material inventory - Beginning material inventory.
❖ Prepare a schedule of direct labor costs, based on production level (step 2), estimated labor rates, and labor methods.
❖ Prepare a schedule of manufacturing overhead costs. This schedule consists of two parts:
a. Fixed overhead (remains stable over a wide production range).
b. Variable overhead (determined by the production budget (step 2) and the per unit budgeted costs.
❖ Prepare a schedule of desired ending inventory levels, to be used for the construction of budgeted financial statements.
❖ Prepare a cost of goods sold budget, using the information gathered in 3 through 6, above.
❖ Prepare a budget of selling, administrative, and other expenses, usually determined by group executive judgment and statistical analyses.
❖ Prepare a cash budget, taking into consideration the effects on cash position of the level of sales and related collections of cash, and on production and the related disbursements of cash.
a. Beginning cash + cash receipts = Total cash available before financing.
b. Cash disbursements = Purchases of materials + Salaries and wages + other cash outlays +acquisition of fixed assets + Investments. (Note that non-cash expenses such as depreciation are not included.) Future anticipated dividend payments would normally be included in the cash budget.
c. Financing requirements include repayments of the obligations, interest expense, and other investments that may be planned.
d. Ending cash balance = Beginning cash balance + Cash collections - cash disbursements.
❖ Prepare a budgeted income statement. (Note: an income statement would include depreciation and other non-cash revenues and expenses.)
❖ Prepare a budgeted balance sheet, using the...