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Benefits of Budgeting
A budget is prepared for control and planning purposes. Use of budgets allows for identification and setting of business goals and objectives. Forecasted values provide for profit analysis as well as performance evaluation and cash allocation. Master budget incorporates a set of operating, cash, program, and financial budgets for a specific accounting period (Collin 2011). A master budget incorporates all of the forecasted estimates in the financial and operating segments of the business.
At each production stage, a manufacturer creates a budget to assist in tracking of costs associated with the production of a product. Manufacturers use either a standard budget or an actual budget. A standard budget is prepared for the whole accounting period while an actual budget is prepared monthly (Dennis 2010). The budget allows a manufacturer to analyze costs and set prices for future as well as set prices for the products.
Benefits of Budgeting
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A manufacturer’s budget includes a set of three budgets that forecast cost of direct materials, direct labor, and overheads for the units to be produced during the production process. Through the budget, manufacturers can estimate the total cost used in production products listed in the production budget. Direct materials budget contains the cost of raw materials, direct labor budget consists of total labor hours used for the production of some units while overhead budget provides for the variable and fixed costs (Dennis 2010).
Budgeted income statement and balance sheet are the financial budgets included in the set of budgets to estimate profits. After preparation for budget used in production and cost estimation, a budgeted income statement shows the total profits to be realized from selling the finished products. The statement helps management to know whether the products will produce good returns. A pro forma is used to calculate financial results to emphasize current and estimated values (Tanner 2015).
References
Collin Barrow (2011). Practical financial management. Retrieved from https://books.google.com/books?isbn=0749462671
Dennis Ippolito (2010). Why budgets matter. Retrieved from https://books.google.com/books?isbn=0271045973
Tanner (2015). Financial budgeting. Retrieved from http://www.unf.edu/~dtanner/dtch/dt_ch41.htm
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