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WHAT IS A BUDGET?
From an organization point of view, it is a signal from management of what is important and therefore should be given time and attention.
Planning
1. Budgets are useful because they enhance: a. Communication. b. Coordination. 2. The process of developing a budget forces managers to consider: a. Goals. b. Objectives. c. Specify means of achieving them.
Budgetary control involves : Developing budgets Analyzing the differences between actual and budgeted results Taking corrective action Modifying future plans, if necessary
The main benefits of budgeting It requires all levels of management to plan ahead It provides definite objectives for evaluating performance It creates an early warning system for potential problems It facilitates the coordination of activities within the business It results in greater management awareness of the entitys overall operations It contributes of positive behaviour patterns throughout the organization by motivating personnel to meet planned objectives
THE ROLE OF ACCOUNTING DURING THE BUDGETING PROCESS Provide historical data on revenues, costs and expenses Express managements plans in financial terms Prepare periodic budget reports
Sales Budget
1. Sales budget is the first step in the budget process. 2. It comes first because other budgets cannot be prepared without an estimate of sales. 3. Example: production estimates are based on forecast sales.
Companies use a variety of methods to estimate sales: a. Econometric models. b. Previous sales trends. c. Trade journals and magazines. d. Sales force estimates.
Production Budget
Production forecasts are based on the following relationships: Finished units to be produced
=
expected sales in units + desired ending inventory of finished units beginning inventory of finished units
d. Cannot be determined
d. Cannot be determined