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Master budgets, financial analysis and zero-based budgets

The comprehensible master budget plan encompassing all the individual budgets related to sales, cost of goods sold, operating expenses, capital expenditures, and cash. The master budget encompasses all functions and management levels, although the approach to formulating the budget may differ from company to company. Two opposite and extreme views of how to develop a master budget is the top management approach (input comes only from top officers), and the grass roots approach (all levels participate in forecasting). Irrespective of who is involved in providing input, the following sequence is generally followed in constructing a master budget.

1. Sales budget
2. Production budget
3. Direct material purchase budget
4. Direct labor budget
5. Factory overhead budget
6. Ending inventories budget
7. COGS budget
8. Selling expense budget
9. Administrative expense budget
10. Budgeted income statement
11. Cash budget
12. Budgeted balance sheet

Zero based budgeting subjects all programs, activities and expenditures to justification (in contrast to incremental budgeting). Funding requests, recommendations and allocations for existing and new programs are usually ranked in priority order on the basis of alternative service levels, which are lower, equal to and higher than current levels. This process can be used in conjunction with either line-item budgeting and/or program budgeting.

To extrapolate:

Zero-based budgeting (ZBB) is a particular kind of program budget. It is a process designed to analyze the very essence of an agency, program, division, or department to determine its worth and value to the government and its citizens. It is a process which, in its purest form, assumes the agency and program do not exist and builds its programs, operations, and budget from zero to its optimum level. ZBB gained prominence in the
late 1970s and early 1980s.

Solution Preview

~Characteristics of ZBB~

The key characteristics of zero-based budgeting are:
1) It begins at zero resources.
2) It forces the ranking of organizational purposes and programs.
3) It requires a clear focus on the priorities of and alternatives to the entity's operations.

~ Ranking Priorities~
ZBB takes many different forms in addition to the one its title implies. In some applications, a ...

Solution Summary

The comprehensible master budget plan encompassing all the individual budgets related to sales, cost of goods sold, operating expenses, capital expenditures, and cash. The master budget encompasses all functions and management levels, although the approach to formulating the budget may differ from company to company. Two opposite and extreme views of how to develop a master budget is the top management approach (input comes only from top officers), and the grass roots approach (all levels participate in forecasting). Irrespective of who is involved in providing input, the following sequence is generally followed in constructing a master budget.

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