This article will take you through the major steps in preparing budgets. Preparation of budgets can be best explained under "Bottom-Up" budgeting approach.
We mostly deal with scare resources. As the main intention of a business is to make profit, careful analysis and planning is required to obtain the maximum benefits from the available resouces.
The key resource which is short in supply will be identified as the Principal Budgeting Factor. It is advised to initiate budget preparation from the principal budgeting factor as it will directly have an impact on the activities and level of activities to be performed.
Assume Sales is identified as the limiting factor. Let's start from there and move forward to faciliate the other requirements.
Are you confused??? If yes, read the rest carefully and if no, still read the rest carefully but after taking one long deep breath.....
This is how it goes....
Since Sales limits your planning, first plan for the sales for the next period considering the potential demand. Then, taking your opening and closing inventory policy, calculate the number of units that need to be manufactured. Remember - It is not a must for the sales demand to be equal to production units as inventory policy will have a direct impact on the production level.
Now you know how many units you need to produce for the next next period. Once you know that, the rest is setting the background/manufacturing facilities to cater the production requirement. Do separate calculations to find how much of raw materials required to be purchased and the cost of it, what is the company's labour requirement to facilitate the production and the cost of it and other production overheads required to incur to obtain the initially planned production level.
All above expenses together will lead to preparation of Cost of Goods Sold Budget. Along with Selling & Distribution Budget and General Administration Budget will lead to the Master Budget Preparation.
Example:
You have been appointed to prepare the budget for OSMI for the up-coming budget period. The demand for the two products OSMI manufactures; OS1 & OS2, has been estimated at 1,500 units and 1,000 units respectively (Unit selling prices of $400 for OS1 & $600 for OS2).
Using above data, prepare the Sales Budget, Production Budget, Raw Material Budget & Labour Budget.
Answer:
Purindu B Jayatilake
MSc Eng (Reading), MBA, BSc (Hons) Eng, ACMA (UK), CGMA
#budgeting #debtfreecommunity #financialfreedom #budget #debtfreejourney #personalfinance #debtfree #daveramsey #money #finance #frugalliving #goals #financialindependence #savingmoney #debtfreeliving #financialliteracy #budgetingtips #daveramseybabysteps #savings #frugal #debtfreegoals #debt #budgetlife #debtfreedom #debtsnowball #babystep #savemoney #budgetplanner #moneymanagement #bhfyp
Commentaires