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Budgeting Basics
Budget
formal written statement of managements plans for a specified future time period, expressed in financial terms. a) provide historical data on revenues, costs, and expenses, b) express managements plans in financial terms, and c) prepare periodic budget reports.
Benefits of Budgeting
a) All levels of management plan ahead. b) Definite objectives for evaluating performance. c) Early warning system for potential problems. d) Coordination of activities within the business. e) Management awareness of the entitys overall operations. f) Motivates personnel throughout organization to meet planned objectives.
Annual budget
supplemented by monthly and quarterly budgets
Long-range planning
identifies and selects strategies to achieve goals and develop policies and plans to implement the strategies
Long-range plans
contain less detail
Compared to budgeting, long-range planning generally has the: a. same amount of detail. b. longer time period. c. same emphasis. d. same time period.
Compared to budgeting, long-range planning generally has the: a. same amount of detail. b. longer time period. c. same emphasis. d. same time period.
A set of interrelated budgets that constitutes a plan of action for a specified time period. Developed within the framework of a sales forecast.
Financial budgets
focus on the cash resources needed to fund expected operations and planned capital expenditures
Sales Budget
The sales budget is prepared by multiplying the expected unit sales volume for each product by its anticipated unit selling price. For Hayes Company, sales volume is expected to be 3,000 units in the first quarter with 500-unit increments in each succeeding year. Based on a sales price of $60 per unit, the sales budget for the year by quarters is shown below:
HAYES COMPANY Sales Budget For the Year Ending December 31, 2005
Quarter 1 2 3 4 Year Expected unit sales 3,000 3,500 4,000 4,500 15,000 Unit selling price $60 $60 $60 $60 $60 Total sales $180,000 $210,000 $240,000 $270,000 $900,000
Production Budget
Shows the units that must be produced to meet anticipated sales. It is derived from the budgeted sales units (per sales budget) plus the desired ending finished goods less the beginning finished goods units. The production requirement formula is:
Desired Ending Finished Goods Units Beginning Finished Goods Units Required Production Units
Production Budget
Hayes believes it can meet future sales requirements by maintaining an ending inventory equal to 20% of the next quarters budgeted sales volume. The production budget is shown below.
HAYES COMPANY Production Budget For the Year Ending December 31, 2005
1 3,000 700 3,700 600 3,100 Quarter 2 3 3,500 4,000 800 4,300 700 3,600 900 4,900 4 4,500 1,000 5,500 Year
Expected unit sales Add: Desired ending finished good units Total required units Less: Beginning finished goods units Required production units