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Financial Accounting Homework Help from Classof1.com
Subect: Financial Accountin
Preparing the Master Budget
The master or static budget is prepared for a single level of volume based on management’s best
estimate of the level of production and sales for the coming period. The master budget is usually
prepared one year in advance, corresponding with the company’s
fiscal year. It is often divided intothe four calendar quarters of the year, with the upcoming quarter broken down further intomonths.
Many companies prepare a continuous or rolling budget that ‘‘rolls forward’’ so that as one month
or quarter is completed a new month or quarter is added at the end of the budget, resulting in a budget that is always one year in advance. Advocates of continuous budgeting argue that it causesmanagers to have a more long-term perspective, rather than just concentrating on the next monthor quarter. The master budget includes operating budgets and financial budgets.Operating budgets include components of the pro-forma (projected) financial statements, such asthe sales and production budgets that are part of the budgeted income statement. Operating budgets are stated in both units and dollars. Financial budgets include the budget balance sheet, budgeted retained earnings statement, and budgeted cash flows statement, as well as the cash andcapital expenditures budgets. Details from the operating budgets are incorporated into the financial
budgets to determine the organization’s generation and use of funds f
or the period.The budgeting process for a manufacturer is much more complex than that for a merchandising orservice business. Manufacturers have to budget for the acquisition of raw materials and labor, as well as for the incurrence of a significant amount of manufacturing overhead costs. In contrast,merchandisers purchase products in their final form, and service businesses provide a servicerather than a product, thus simplifying the budgeting process.