Budgeting and Forecasting
Budgeting is the process of creating a financial plan for a future period, while forecasting uses historical data and assumptions to predict future financial outcomes.
Explanation
The master budget includes operating budgets (sales, production, direct materials, direct labor, overhead, selling and administrative) and financial budgets (cash budget, budgeted income statement, budgeted balance sheet). The sales budget drives all other budgets. Static budgets are set for one activity level; flexible budgets adjust for actual activity levels, making variance analysis more meaningful. Zero-based budgeting requires justifying all expenses from zero each period rather than using prior-year amounts as a starting point.
Key Points
- •Master budget starts with the sales budget
- •Flexible budgets adjust for actual activity; static budgets do not
- •Cash budget: beginning cash + receipts − disbursements = ending cash
Exam Tip
The production budget formula is: budgeted sales + desired ending inventory − beginning inventory = required production.
Frequently Asked Questions
Related Topics
Variance Analysis
Variance analysis compares actual results to standard or budgeted amounts to identify and explain the causes of deviations in cost and revenue performance.
Cost-Volume-Profit (CVP) Analysis
Cost-volume-profit analysis examines the relationships among costs, volume, and profit to determine how changes in each variable affect operating income.
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