Budgets and Budgeting
| Author | Roger Doost |
| Pages | 58-60 |
Page 58
A budget is a financial plan for the upcoming period. A capital budget, on the other hand, involves an organization's proposed long-range major projects. The focus of this section is on budget. Public and private entities both engage in the budgetary process. A government budget starts with the projection of sources and amounts of revenue and allocates the potential receipts among projects and legislatively mandated programs based on projected needs and public pressure. Government entities actually record budgets in the accounting records against which expenditures can be made.
A budget is a quantitative plan of operations that identifies the resources needed to fulfill the organization's goals and objectives. It includes both financial and nonfinancial aspects. Budgeting is the process of preparing a plan, commonly called a budget. A master budget is comprised of operating budgets and financial budgets. Operating budgets identify the use of resources in operating activities. They include production budgets, purchase budgets, human resources budgets, and sales budgets. Financial budgets identify sources and outflows of funds for the budgeted operations and the expected operating results for the period. Some variations of budgets are continuous budgets and continuously updated budgets. Rather than preparing one budget for the upcoming year, in a continuous budget one updates the budget for the following twelve months at the end of each month or each quarter. Such a budget remains more current and relevant. A good budget uses historical data as a base and for reference but at the same time incorporates anticipated costs and volumes based on a comprehensive knowledge and understanding of both internal and external factors that affect the business.
The master budget includes a sales budget, which shows expected sales in units and in dollars. A merchandising firm needs to budget for the goods it needs to purchase for resale; these purchases become its cost of sales. A manufacturing organization's master budget includes a production budget, which uses the sales budget and inventory levels anticipated at the beginning and end of the period to determine how much to produce.
The production budget needs to be exploded into budgets for direct material, direct labor, and manufacturing overhead. Direct material and direct labor are items clearly identifiable in the finished product. Manufacturing overhead includes all costs of manufacturing except direct material and direct labor, such as machine depreciation, utilities, and supervision. The direct material budget explodes the production into basic ingredients; quantities to be purchased are anticipated based on expected inventory levels at the beginning and end of the period. With the help of the...
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