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What are the components of a budget? Should every organization forecast a budget?

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What are the components of a budget? Are they the same for every organization? Why or why not? Should every organization forecast its operating budget? Why or why not?

Who are the users of financial statements? How would users differ in their views of the financial statements? Why would they rely on financial statements?

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Solution Summary

This discusses types of budgets, the components of a budget, advantages and disadvantages to budgeting and types of information provided to stakeholders in approximately 900 words.

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What are the components of a budget? Are they the same for every organization? Why or why not? Should every organization forecast its operating budget? Why or why not?

Budgeting is one of the tools of the management control. Internal control programs are critical to any organization, because without it the results could be chaotic. Master Budget can provide the basis for detailed sales targets, staffing plans, inventory production, cash investment/borrowing, capital expenditures (for plant assets, etc.), and on and on. Budgets provide benchmarks against which to compare actual results and develop corrective measures.

Components of budget:

Master Budgets consist of many individual building blocks that are tied together in logical harmony, and reflect the financial plan for the entire organization. Careful articulation is essential.

The starting point for the master budget is an assessment of anticipated sales via the sales budget. The expected sales level drives both the production plans and the selling, general, and administrative budget. Production drives the need for materials and labor. Factory overhead may be applied based on labor, but it is ultimately driven by overall production.

Components of Master Budget
SALES BUDGET:
Master budget begins with a sales budget. The sales budget reflects forecasted sales volume and is influenced by previous sales patterns, current and expected economic conditions, activities of competitors, and so forth. For the budget to be useful, careful consideration must also be given to the timing and pattern of cash ...

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