Question

explain meaning of the budget, the reason for preparing the budget, the period for which the budgets are prepared, along with the justification of why the budget is important for these budget sales budget, cost of production budget, cash budget, purchade budget

Answer 1

Budget: budget refers to the estimation about the revenue and expenses of the business for a definite future period. The budget can be made for the individual or entity. In case of business, the budget is prepared to forecast the future operating activities so the management would take the necessary actions for achieving the expected sales level.

Reason for preparing the budget:

• The budget can be helpful in controlling the cost of the business.
• The budget can work as a standard to be achieved in future.
• The budget helps in tracking the spending areas and can help in eliminating the bottleneck in the process.
• The budget estimates the future activities. Therefore, it helps in the preparation for the emergencies.

Budget period:

The time period for which a budget is prepared is known as budget period. The budgets are prepared for the short-term and long-term.

Short-term budget: The budgets prepared for a short period such as one year or less than a year is known as short-term budget. The short-term budget is popular in seasonal industries.

Long-term budget: The budget prepared for a long period such as more than a year is known as long-term budget. The long-term budget is popular in heavy capital industries.

Importance of the following budget:

Sales budget: The sales budget is most important budget. It forecast the future expected revenue level. The production is estimated on the basis of the estimated sales level. It is the basis for most of the budgets such as purchase budget, production budget and cash budget.

Cost of production budget: The cost of production budget shows the planning of the production for the expected period to achieve the expected sales level. The sales can only be achieved when the company correctly estimates the production level and produces enough inventories for sales.

Cash budget: The cash budget shows the net cash inflows and outflows in the budgeted period. The correct estimation of the cash would result in the high liquidity for the company.

Purchase budget: The purchase budget shows the quantity of raw material that should be ordered to achieve the desired production level estimated in the cost of production budget. The correct estimation of the purchase budget would result in the correct estimation of the cost of production budget which would directly affect the sales budget. Hence, all the budgets are directly or indirectly intertwined.

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