Question

1) What are the components of the Master budget? Which ones are critical?

2) Name the primary benefits of budgeting?

3) What should be the length of the Budget period and why?

4) What factors should be considered in Sales Forecasting?

Answer 1

Answer (1)

The components of the Master budget are as follows:

The master budget includes the following:

• Operating budget: The operating budget comprises of:

• Sales Budget
• Product Budget
• Purchase Budget
• Direct Labor Budget
• Overhead Budget
• Selling and Administrative Expenses Budget
• Cost of Goods Manufactured Budget

All of the when transferred to budgeted income statement helps in estimating operating   income for the specified period.

• Capital expenditures budget: This budget shows long term investment plans in capital assets like plant, land, building, machinery, equipment, and other long-term assets.
• Financial budget. This budget comprises of cash budget and the budgeted income statement and position statement.

All the components of master budget are critical as, all these components are interconnected, which means that results of one component serves as the basis of other component. For example results of operating budget are used in financial budget for preparing budgeted income statement. So, it is important that master budget is prepared in a specific order, so that flow of information will be correct.

Answer (2)

The primary benefits of budgeting are as follows:

• Planning for quantitative manifestation.
• Controlling for identifying loopholes and potential risk.
• Facilitates Coordination among various departments and procedures
• Assessment of actual performance
• Acts as a source to communicate organisation’s strategy in monetary terms.

Answer (3)

The length budget period is not essentially an accounting period or financial period of one year rather it can cover any duration time period. There are lot of factors that influence its preparation like type and size of business, business conditions, etc. The most often time period used is a One year. The yearly or annual budget is supported by monthly and quarterly budgets. Preferably, time period of budget should be long so as to provide achievable targets under normal business scenario, but it should not be too lengthy where estimates are impossible.

Answer (4)

Factors that should be considered in Sales Forecasting are as follows:

• Present economic conditions
• Present industry conditions
• Prevailing rate of inflation
• Organization resources and setups
• Marketing potential of business
• Seasonal demands based on periodic conditions.