COST MANAGEMENT ASSIGNMENT
Elements of Periodic Budget
A complete periodic budget generally consists of following important elements:
- Sales budget
- Production budget
- Manufacturing budget
- Budgeting commercial expense
- Budgeted income statement
- Budgeted balance sheet
- Sales Budget
A sales budget is a valuable tool that gives a direction to a company with regard to its targeted sales. This is the most important element of the periodic budget that based on realist sales estimates based on analysis of the past sales. It helps to improve the profitability of a company. The company makes a financial plan with regard to the amount of goods and services that it plans to sell in a year and the price at which the goods and services are to be sold. This plan is its sales budget.
- Production Budget
Production budget refers to detailed plan showing the number of units that must be produced during a period in order to meet both sales and inventory needs. Production requirements for a period are influenced by the desired level of ending inventory. Inventories should be carefully planned. Excessive inventories tie up funds and create storage problems. Insufficient inventories can lead to lost sales or crash production efforts in the following period.
- Manufacturing budget
Manufacturing budgets are prepared for direct material, direct labor and factory overhead budget to identify these costs with product.
Schedule showing how much material will be required for production and how much material must be bought to meet this production requirement. The purchase depends on both expected usage of materials and inventory levels.
A schedule for expected labor cost. Expected labor cost is dependent upon expected production volume (production budget). Labor requirements are based on production volume multiplied by direct labor-hours per unit. Direct labor-hours needed for production are then multiplied by direct labor cost per hour to derive budgeted direct labor costs.
Factory Overhead Budget
Schedule of all expected manufacturing costs except for direct material and direct labor. Factory overhead items include indirect material, indirect labor, factory rent, and factory insurance. Factory overhead may be variable, fixed, or a combination of both.
- Budgeting Commercial Expense
The company’s chart of accounts is the basis for budgetary control of the commercial expenses which includes both the marketing and administrative expenses.
Marketing Expense Budget
Marketing expense budget is the estimation of cost to be included in the marketing. Marketing expenses are fall under two categories:
- Obtain the order which involves selling and promotion
- Filling the order which involves warehousing, packing, shipping, credit and collection and general accounting of marketing activities.
It includes the cost that is unique to administration such as directors’ fee, franchise taxes, capital stock and professional services.
- Budgeted Income Statement
Budgeted income statement refers to summary of various component projections of revenues and expenses for the budget period. It indicates the expected net income for the period. Moreover budgeted income statement :
- illustrates a company’s projected sales, costs, expenses and net income
- based on: Sales, Purchases, Selling Expenses and Administrative Expense Budgets
- used to project net income or loss
- able to project federal income tax
- Budgeted Balance Sheet
Budgeted balance sheet refers to schedule for expected assets, liabilities, and stockholders’ equity. It projects a company’s financial position as of the end of the budgeting year.
- the final step in preparing the master budget
- summarizes the company’s financial position
- predicts amounts of the company’s assets, liabilities and equity at the end of the budget period