University:
Baltimore City Community College
Course:
ACT 221 | Principles of Financial Accounting I
Academic year:

2024
Views:

406

Pages:

3
Author:

Danny A.

Budget Interrelationships These budgets are interrelated and cannot be prepared independently. For example, the expected level of sales influences the production budget; the number of units of production affects the raw material pur-chases, direct labor, and factory overhead budgets; and each of the first nine components of the master budget affects the cash budget. The interrelationship of the components of the master budget is illustrated in Exhibit. The accurate forecasting of sales is the key element in preparing the master budget. The sales budget is prepared from the sales forecast; the production budget, expected cash flows, and the budgeted financial statements are all affected by the sales forecast. The factors that should be considered when preparing a sales forecast include: 1. Previous years' sales. 2. Potential changes in sales price. 3. Potential changes in market strategy. 4. Market research. 5. National economic conditions. 6. Industry outlook. 7. Advertising. 8. Competition. Previous years' sales are used as the starting point when preparing a sales forecast. Then the factors listed above that are expected to have an impact on sales during the coming period are considered. For ex-ample, a planned price increase for the company's product might be expected to have an adverse effect on unit sales, whereas a new advertising campaign should result in an increase in unit sales. Sales forecasts may also be made with the assistance of regression analysis and/or economic models. These techniques have been demonstrated to improve the quality of sales forecasts, but their discussion is beyond the scope of this text. Once the sales forecast has been accomplished, the production budget is prepared. The usage of raw materials and required raw material purchases are both associated with forecasted production. The production budget also affects both the direct labor and the factory overhead budgets. The general and administrative and capital expenditures budgets are usually prepared by management. The final step in preparing the master budget is preparing the cash budget and the forecasted financial statements. The cash budget requires an analysis of all expected cash inflows and outflows as well as an evaluation of the need for additional short-term financing. The forecasted financial statements require an analysis of the impact of all anticipated business transactions on the various accounts in the general ledger. The Master Budget—An Illustration The preparation of a master budget will be illustrated for the Lewis Corporation. The company manufactures a single product and wishes to prepare a budget for the first quarter of 1992. The illustration of the capital expenditures budget and the budgeted statement of cash flows is excluded at this time for the sake of simplicity. The preparation of the capital expenditures budget is illustrated in Chapter before. Lewis Corporation's December 31, 1991, balance sheet, prepared at the beginning of the budget period, appears in Exhibit.