Question

What are the different types of budgets in a master budget?

Why is it important to get the figures for a budget as ‘accurate’ as possible? Or, indeed, is it important?

How do relevant costs and revenues contribute to sound decision making?

What types of costs and revenues are relevant to decision making? Why?

Answer 1

1) Master budget is the overall plan of operations for a company or business unit over a year. The different types of budgets in a master budget includes

1. sales budget = to estimate of the entities future sales for upcoming period

2.production budget = a plan for acquiring resources and combining them to meet sales goals and maintain certain level of inventory

3.direct material budget = determine required amount of materials, based on the quality level of the materials needed to meet production.

4. direct labor budget = specifies the direct labor needed to meet the production requirements.

5. overhead budget = determine the indirect costs associated with the production.

6. selling and administrative budget = determine the non manufacturing costs associated with the production.

7.capital budget = represents the amount of money company plans to invest in long term projects

8. cash budget = determine the cash needed in all areas of operation

9. proforma balance sheet = last item prepared in master budget

10. proforma statement of cash flow = represents projected sources and uses of funds.

2) Indeed it is important to get the figures for a budget is accurate . Because if the budgeted figures become wrong it will affect the companies future plan and forecasting. If the figures in a sales budget become wrong it may miss lead other budgets because its the base for budgeting, then the entire forecasting and decision making will be a flop.

3) relevant costs and revenues are those costs and revenues which will change if the decision is implemented. differential cost,opportunity costs,costs are considered to making decision about adding or dropping a product line,making or buying a product. This helps to avoid unnecessary data that complicate a firm to take critical decision making.

4) relevant costs are differential cost, opportunity costs , avoidable cost and relevant revenues are revenues forgone, revenues recovered are to be considered before conducting a business decision. Because without considering these costs and revenues the decision making process becomes invalid and the firm cannot implement its plan and achieve its goal.