Fundamentals of Cost Accounting Study Set 4
Quiz 13 :
Planning and Budgeting
Long-Range Forecasts: These forecasts are estimated for more than two years period. These are for new market entry, new products and services development, facility expansion, signing long term agreements and contracts. These are used in mining, petroleum, shipping, pharmaceuticals, etc. Among the budgets for coming period and long-range forecasts, the coming period budgets will have more detail information. This is because; the budgets are prepared for a time lesser than the longer-range forecasts. The budget plan is an overview of operations covering the coming period. The budget should provide sufficient details that show the appropriate and adequate direction to various stakeholders about the operations of the business.
Cash budget: Cash budget is budgeted cash disbursements and receipts over a period of time. These include the expected cash inflows from sales receipts, sale of equipment, other sales i.e. any form of inflows and all outflows to cover the expenses. The net cash balance in hand is also shown in cash budget. Income statement: It is also known as profit and loss statement which shows the revenues, expenses, and the net income or loss during the period. The net income is calculated by subtracting the total expenses from the total income. Profit: Benefit received on particular transaction after deducting all the expenses relating such transaction is termed as profit. The profit is recognized only when it is received or realized. When the items are recognized in the financial statements link income statement and balance sheet, the cash receipts and cash disbursements would be taken place in different time periods. Therefore, in order to determine the cash receipts and cash disbursements would be taken place in different time periods; the company should prepare the cash budget.
Budget: The projection of transactions based on the available resources for a certain period is called budget. It also refers to the condensed form of preparing projections or plans for a certain period in the form of dollars. The budget helps the companies to analyses and estimates the costs over a period of time. The budgets are used by any company with complex production processes and enable the management to put down in document their objectives for the period of time. The budgets are made by the companies of all sizes at all levels of complexity. The following are the four methods used to estimate sales for budgeting purposes: (a) Econometric methods: This method is used to estimate the sales using statistical models. (b) Delphi technique: This method is used to estimate the sales by collecting and analyzing the opinion of experts. (c) Trend analysis: This method is used to estimate the sales using the statistical analysis of historical data. (d) Market research: This method is used to estimate the sales by collecting information on the macroeconomic trends from the industry and local markets.