![]() ![]() The information from the sales budget is carried to several places in the master budget. The sales budget details the expected sales in units and the sales price for the budget period. This overestimate will cause management to have spent more cash than was necessary. Likewise, if sales are overestimated, management will have purchased more material than necessary and have a larger labor force than needed. Customers may then shop somewhere else to meet their needs. ![]() If the estimate is understated, the company will not have enough inventory to satisfy customers, and they will not have ordered enough material or scheduled enough direct labor to manufacture more units. It is critical for the sales estimate to be accurate so that management knows how many units to produce. From there, they determine the expenditures, such as direct materials necessary to produce the units. When management has a solid estimate of sales for each quarter, month, week, or other relevant time period, they can determine how many units must be produced. The budgeting process begins with the estimate of sales. In short, each component-sales, production, and other expenses-must be properly budgeted to generate the operating budget components and the resulting pro-forma budgeted income statement. This means the company must understand when and how many sales will occur, as well as what expenses are required to generate those sales. In order for an organization to align the budget with the strategic plan, it must budget for the day-to-day operations of the business. It is important to obtain all of the information, however, because the more accurate the information, the more accurate the resulting budget, and the more likely management is to effectively monitor and achieve its budget goals. Assumptions such as sales in units, sales price, manufacturing costs per unit, and direct material needed per unit involve a significant amount of time and input from various parts of the organization. Operating budgets are a primary component of the master budget and involve examining the expectations for the primary operations of the business. ![]()
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