13-04-2012, 05:11 PM
COMPONENTS OF THE MASTER BUDGET
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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 for 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 purchasing department, the prices for the needed materials are computed to arrive at the material purchases budget. The direct labor budget uses industrial engineering guidelines and production needs to estimate labor requirements. The human resources department provides the labor rates for the skill levels required.
THE BUDGETING PROCESS
Budgeting is—or should be—the result of teamwork. A top-down budget is a budget that is essentially imposed on the organization by top management. This may be an efficient way to prepare a budget but because of lack of participation by the employees, such budgets often bring with them a level of employee resentment and resistance that leads to problems in implementation of what is proposed. Employees do not feel a sense of ownership in a budget in which they have not been participants. A participatory or bottom-up budget, on the other hand, starts with the employees in each department determining their needs and requirements in order to achieve the company goals. Because employees feel a sense of ownership in such budgets, they attempt to meet or exceed those expectations.
OTHER BUDGETING TECHNIQUES
An incremental budget is a budget that is prepared based on prior-year figures, allowing for factors such as inflation. Although such an approach is used by some government entities, most people frown upon such a practice because it is contrary to the whole notion of a budget, which is supposed to be a calculated and wise anticipation of the future course of events with due consideration of all potential factors. A zero-based budget, on the other hand, is a budget that does not take anything for granted. It starts from point zero for each budgetary element and department each year and attempts to justify every dollar of expenditure. Although some industries had implemented such a method earlier, it was first used in preparing the state of Georgia's budget in the early 1970s and was later used to prepare the federal budget in late 1970s during President Carter's administration. However, it was soon abandoned because the paperwork generated and timeframe necessary to do this task proved to be too cumbersome for the federal government.
MONITORING THE BUDGET
A flexible budget modifies the budget to the actual level of performance. Obviously, if the original budget is prepared for say, one thousand units of a product, but two thousand units are produced, comparing the original budget to the actual volume of output does not provide meaningful information. Accordingly, the budgeted costs per unit for all variable costs can be used and multiplied by the actual volume of output to arrive at the flexible change proportionately to the level of output for the former and to the level of sales for the latter cost. Fixed costs, such as rent, however, do not normally change with the level of production or sales. These budgeted costs, therefore, are not adjusted and left intact even though the volume of sales and output may be different from the originally budgeted levels.