The budget is typically prepared for a year and then subdivided into quarterly and monthly periods. The budgetary process begins with sales. The output level of sales or service quantities selected for use in the master budget preparation affects all other organizational components; it is essential that all the components interrelate in a coordinated manner. Text Exhibit 8.5 (p. 306) illustrates the budgetary process showing how the various functional areas of a manufacturing organization interrelate. The process begins with the sales of the types, quantities, and timing department’s estimates of sales. The production manager combines sales estimates with information from purchasing, human resources, operations, and facilities to develop a production budget. The treasurer combines the sales estimates with cash collection patterns and the production requirements information with cash payment patterns to develop a cash budget. LO.3: What are the various components of a master budget, and how are they prepared? The Master Budget Illustrated Text Exhibit 8.7 (p. 308) presents the beginning balance sheet for Dresdill Corp., which is used in the text to illustrate the preparation of the master budget. The sales budget is prepared in both units and sales dollars; dollar sales figures are calculated by multiplying sales quantities by product selling prices (see text Exhibit 8.8 p. 308). Production Budget The production budget follows naturally from the sales budget and uses information regarding the type, quantity, and timing of units to be sold (see text Exhibit 8.9 p. 309). Sales information is combined with information on beginning and ending inventories so that managers can schedule the necessary production: Units to be sold + desired ending units = total needs beginning units = Units to be – produced Ending inventory policy is generally specified by company management, and desired ending inventory is usually a function of the quantity and timing of demand in the upcoming period as related to the capacity and speed of the firm to produce particular units. Other alternatives include a constant amount of inventory, a buildup of inventory for future high-demand periods, or near-zero inventory under a just-in-time system. Managers should consider the high costs of stockpiling inventory before making a decision about how much inventory to keep on hand.
The budget is typically prepared for a year and then subdivided into quarterly and monthly periods. The budgetary process begins with sales. The output level of sales or service quantities selected for use in the master budget preparation affects all other organizational components; it is essential that all the components interrelate in a coordinated manner. Text Exhibit 8.5 (p. 306) illustrates the budgetary process showing how the various functional areas of a manufacturing organization interrelate. The process begins with the sales department’s estimates of the types, quantities, and timing of sales. The production manager combines sales estimates with information from purchasing, human resources, operations, and facilities to develop a production budget. The treasurer combines the sales estimates with cash collection patterns and the production requirements information with cash payment patterns to develop a cash budget. LO.3: What are the various components of a master budget, and how are they prepared? The Master Budget Illustrated Text Exhibit 8.7 (p. 308) presents the beginning balance sheet for Dresdill Corp., which is used in the text to illustrate the preparation of the master budget. The sales budget is prepared in both units and sales dollars; dollar sales figures are calculated by multiplying sales quantities by product selling prices (see text Exhibit 8.8 p. 308). Production Budget The production budget follows naturally from the sales budget and uses information regarding the type, quantity, and timing of units to be sold (see text Exhibit 8.9 p. 309). Sales information is combined with information on beginning and ending inventories so that managers can schedule the necessary production: Units to be sold + desired ending units = total needs – beginning units = Units to be produced Ending inventory policy is generally specified by company management, and desired ending inventory is usually a function of the quantity and timing of demand in the upcoming period as related to the capacity and speed of the firm to produce particular units. Other alternatives include a constant amount of inventory, a buildup of inventory for future high-demand periods, or near-zero inventory under a just-in-time system. Managers should consider the high costs of stockpiling inventory before making a decision about how much inventory to keep on hand.