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Here we discuss budgeting process and the different types of budgets companies use. In case you are stuck with a similar problem, do not hesitate to contact us at [email protected]
It is important to first understand purpose of the entire budgeting exercise which is to ensure effective allocation of resources. As a part of budgeting exercise businesses estimate their fund inflow and outflow for a particular period in future and then decide their actions. This helps in running a business effectively and efficiently. The entire exercise involves not only company’s finance department but production, procurement, sales department along with others. There are different types of budgets which are used for management of businesses. Here they are briefly discussed in the order in which they are made.
The entire budgeting exercise begins by preparing a sales budget. This is used to forecast revenue for a given period.
Sales budget sets sales goals, which can be met only with the help of production department. The department has to estimate number of units which must be produced to support the sales team. A production budget helps them in this regard.
Direct Materials Budget
This budget is prepared after production budget. It helps in figuring out the quantity of material which would be required to fulfil the requirements of production budget.
Manufacturing Overhead Budget
This budget takes in to account manufacturing costs other than direct materials and labor cost. Apart from efficient allocation of financial resources this budget helps in calculating per unit over head allocation which helps in finding out per unit cost of finished good.
Selling and Administrative Budget
Based on number of units to be sold company can estimate selling and administrative expenses to be incurred over a specific period in future. This budget helps in knowing in advance the amount which company would need to incur to meet its sales goals.
Company’s master budget is made using the sub budgets described above. This budget helps define company’s financial and production goals.
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