a. To determine the planned production of finished goods in units:
b. To determine the cost of finished goods manufactured:
c. To determine the cost of finished goods inventory at March 31:
d. To determine the cost of goods sold:
A business may expect to benefit from preparing a formal budget in several ways, including:
a. The process of preparing the budget forces management to consider all aspects of the company's activities and also many aspects of the external business environment. Thus, budgeting should make managers more aware of the company's resources, problems, and environment.
b. A budget is a forecast of the outcome of future events. Thus, it may give advance warning of impending problems, such as cash shortages.
c. The preparation of a budget provides an opportunity to coordinate the efforts of the various departments in the business so that all are working efficiently toward common goals.
d. The budgeted levels of performance provide a yardstick for evaluating the actual performance of company personnel.
Budgeting is a process of estimating the revenue and expenses of the near future in advance to plan and to be used in the decision-making process. The budget is generally prepared on the past analysis and trends. The budgeted data act as a benchmark for the actual values derived.
For an expense budget to be profitable, the actual values should be less than the budgeted so estimated. A company strives to earn maximum profit by reducing costs. In such a way budgets are helpful in the decision-making process. These budgets are prepared by the management. They are tentative only and provides the company a rough idea about the costs and revenues.
The master budget is a common word used for all types of budgets related to sales, production, and expenses etc. The budgets so prepared act as a working note as the values computed under these budgets are used in the computation of cash budget and the financial statements. It is prepared to have a look on the responsibility centers and to evaluate their performance as well.
Items that forms part of master budget are as follows:
• Sales budget
• Production budget
• Direct material budget
• Direct labor budget
• Manufacturing overhead budget
• Selling and administrative budget
• Cash budget
• Budgeted income statement
• Budgeted balance sheet
Preparation of sales budget is the most important and foremost budget in the preparation of master budget. It determines the level of production which is been required to prepare the next budgets in the list. Also, it helps in determining the need for cash in the production process which is directly related to the production forecasted in sales budget. It also helps in the financial planning. The projected values are determined from past trends and the growth of the company in recent financial years.