Question

Besides defending the assumptions made when preparing a budget, the preparer should be able to defend the numbers in a budget. For example, if minimum wage is increasing significantly and the majority of the companies employees receive minimum wage, the company should adjust the budget to reflect that- they shouldn't just budget for an ordinary cost of living adjustment of 3%. In this example, the new law served as the basis for the increase in salaries. Provide examples of income or expense items and what you would base the increase or decrease upon.

Answer 1

Every-year the budget is being framed through undertaking increase in cost towards the expense item. As explained in the question, the increase of cost of living adjustment in Wages expense. The other expenses items which required increase are:

1) Inventory and overhead expense : The inflation effect on the inventory cost should be considered while framing budget.

2) Supplies expense : The increase in the supplies cost in the budgetary period due to inflation effect.

3) Research and development expense : The increase in R&D costs of the budgetary period due to expectation in increase in innovation and technical changes during the period.

4) Depreciation expense : Increase in the depreciation expense due to increase in the expansion of the business and acquiring new assets or replacement of the old assets or retirement of the assets.

5) Utilities expense : Increase in the Utilities expenses like electricity, telephone, water, rent, transportation, etc. due to increase in the expected increase in business activities.

6) Legal and Claim expense: Expected increase in the legal and claim expense due to confirmation of the contingent expenses/claims and other legal expenses in the budgetary expense.

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