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A budget is a comprehensive plan that estimates probable expenses and incomes over a set period of time (Wildavsky). Budgeting is an extremely important tool that effects several types of real life situations like corporations, small businesses, governments, families, and individuals. Budgeting helps companies use its financial resources in a manner that best exploits business opportunities. Budgeting can also help companies project their utility, marketing, rent, health care, and other costs that go into their business. In result, this gives companies the true cost per unit and helps them set prices on those products (Froot). Budgeting also helps business forecast expenses. For example, averaging the insurance premiums per month helps you set average monthly revenue goals. Budgeting also helps track business’ performance throughout the year. By analyzing the performance, managers are able to make important and necessary changes in costs to maximize profit (Merchant).
A master budget is the term used for a set of financial and operating budgets for a specific accounting period (Froot). Master budgets are prepared quarterly or annually. Master budgets nature and size vary with the type of business. This budget serves as a planning and control tool to the management.
A manufacturer budget is a set of three budgets that estimate the cost of direct materials, direct labor, and overhead. This budget estimates how much it will cost the company to produce the amount of products included in the production budget (Merchant). The direct material budget includes the raw materials needed for each product, budgeted beginning and ending inventory, raw material costs, and number of units set to be produced. The direct labor budget consists of labor hours multiplied by the number of units set to be produced by the estimated number of hours required to produce each unit (Froot). The overhead budget splits the overhead costs into fixed and variable overhead. Income statements and balance sheets are used with these manufacturing budgets.
The term pro forma refers to a method by which financial results are calculated (Wildavsky). A pro forma operating budget is a predicted budget based on unusual circumstances or possible changes to the company’s structure, revenues, profits, or expenses (Froot). A pro forma budget can help companies prepare for unexpected changes in operations such as loans, acquisitions, mergers, etc.
Froot, K. A., & Stein, J. C. (1998). Risk management, capital budgeting, and capital structure policy for financial institutions: an integrated approach. Journal of Financial Economics, 47(1), 55-82.
Wildavsky, A. B. (1986). Budgeting: a comparative theory of the budgeting process. Transaction Publishers.
Merchant, K. A. (1981). The design of the corporate budgeting system: influences on managerial behavior and performance. Accounting Review, 813-829.
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A budget is a formal statement about revenues and expenses that aids in creating cost awareness (Marriner, 1980). Budgeting is without a doubt a time-consuming process. However, not planning is planning to fail, therefore, managers must plan a budget to identify problems before they happen. It also allows for management to occupy their resources in the most rewarding areas (Packeer, 1996). Budgeting allows for managers to be in sync performing operations that go in the same directions and best interests of a company (Packeer, 1996). Lastly, budgeting can help set goals as well as serve as motivation when goals or targets are met (Packeer, 1996).
A set of budgets can be called the Master budget. The master budget is often the last document to be reviewed and approved (Marriner, 1980). This is because usually the heads of different departments are the ones who set departmental goals and prepare a formal plan based on historical, financial, and statistical data collected (Marriner, 1980). Once all budgets for all departments are revised, the master budget can be prepared (Marriner, 1980). Payroll, operating, non-salary, capital, and cash budgets can be found in the master budget (Marriner, 1980).
Manufacturing companies don’t have one budget, rather, they have a series of budgets that after revision make up the master budget. In a manufacturing company, the process starts with goal setting. Past period’s performance must be evaluated as a base for future desired performance (Fleming, 1995). Once the goals are set for the budget year, the process is handed down to the sales manager who is in charge for breaking down sales figures into several types of products (Fleming, 1995). The sales budget is then forwarded to the production manager who is further segments into several budgets including: production quantity budget, inventory budget, direct materials budget, direct labor budget, and manufacturing overhead budget before passing it on to final decision makers for revision (Fleming, 1995). The budgeted financial statements used are the statement of financial position, Income Statement, and Cash flow statement (Fleming, 1995).
Packeer, Mohamad. (1996). Six Key Benefits of budgeting: [Management Times Edition]. New Straits Times, 15. Retrieved on April 25, 2017, from ProQuest database.
Marriner, Ann. (1980). Budgetary Management. The Journal of Continuing Education in Nursing, 11(6), 11-14. Retrieved on April 25, 2017, from ProQuest database.
Fleming, Mary M K. (1995). A Budget model for a small manufacturing firm. Industrial Management, 37(2), 1. Retrieved on April 25, 2017, from ProQuest database.