Product Costing Systems

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Product Costing Systems

Budgeting is one of the most vital exercises in any organization. It is the process through which an
organization plans to spend its money by looking at its income in the past and what it intends to do in
the future. The nature of a budget prepared by an organization is determined by factors such as its
ongoing operations, its long term strategies, and its performance in the past. The budgeting process for
an organization could either be successful or a failure. Successful budgets enable a company to carry out
their future practices without many financing challenges. However, poor budgets could affect the
operations of the company in the future (Kimmel, Weygandt & Kieso, 2010). Therefore, a company
must understand the type of budget that it prepares and its relevance to its operations. The master
budget, the cash flow budget, the financial budget, and the operating budget are the four main types of
budgets that are prepared by most businesses.

Operating Budget

An operating budget is mostly used to plan for the money that comes into the organization and the
money that is spent on various activities. The operations of any business are based on its financial
stability. A company that does not have enough cash at hand or viable creditors might not be able to
finance its operations. An operating budget is created in order to keep track of the income and expenses
of the organization for a specific period (Wedyan, Jaradat & Bshayreh, 2016). Operating budgets can be
prepared at different intervals.

The main role of an operating budget is to plan for the expenditure of the company on supplies. Most
companies prefer to prepare operating budgets on a monthly basis. This makes it easier to compare the
spending characteristics of the company in the short term before any undetectable issues become
enormous. However, companies can also prepare operating budgets on a weekly and yearly basis
(Wedyan et al. 2016). Many operational elements are considered in an operating budget.

The costs of production in the company are the most important elements of an operating budget. These
include costs such as the labor costs, the materials costs, and the overhead costs in the company.
However, comprehensive operating budgets also consider other factors such as the sales of the
company and the administrative expenses (Wedyan et al. 2016). An operating budget helps a company
to ensure that the money coming into the business is sufficient to fund the operations of the business
for the entire budgeting period.

Cash Flow Budget

A cash flow budget is also another important type of budget that companies need to plan for their
operations. This is a budget that plans for the way money flows into the business and how the money is
spent. Cash flow budgets also take account of when the money comes into the business and when it
flows out. The accounts payable and accounts receivable for a company are essential aspects of a cash
flow budget. This is because they outline the amount of money that the company is expecting and the
money that the company is expected to pay out (Penner, 2004). A cash flow budget also has an
important role in the strategic planning of a business.

A cash flow budget helps the company to determine whether its use of cash is productive. A business
could use its finances for many reasons. However, the most crucial aspect is to ensure that the money
that is spent also brings returns. Tracking the money that is s spent and the money that comes into the
business can help a company to accomplish this objective. A cash flow budget also helps a company to
determine whether it has a chance of generating more revenue in the future. The projection of the
money that is spent on operations and the expected returns made using a cash flow budget can be used
to determine this variable. This would help the company to decide whether to start new projects, or
whether it should only focus on the ongoing projects. Seemingly, a cash flow budget also helps to tell
whether the available cash and the expected cash is sufficient to run the company for the budgeting
period (Penner, 2004). A company must be able to finance all its operations in order to remain
sustainable.

Financial Budget

A financial budget is an important type of budget that outlines a projection of all the financial elements
of the organization. A financial budget outlines elements such as the assets of the company, the cash
flow of the company, the revenue earned by the company, and the company’s expenses. These are
important financial indicators in any company. A financial budget comprises the projections from other
smaller budgets that are made regarding the finances of the company (Kimmel et al. 2010). Similar to
the other types of budgets, a financial budget also has various benefits for the company.

The main benefit of a financial budget is helping the management to ascertain the financial health of the
company. Companies could operate for a long period and collapse without any expectation. This implies
that the financial health of the company could have been deteriorating over time without proper
attention from the management (Kimmel et al. 2010). Therefore, a well-drafted financial budget helps
the management to keep track of the company's financial health.

A financial budget also helps to regulate the expenditure of the company relative to its revenue. A
company can only remain sustainable if it is spending less than it earns. However, a company could get
in serious financial problems if it starts to spend more than it earns. This is the reason why companies
need a financial budget. It helps them to project their future revenue and their expenses (Kimmel et al.
2010). This plays an important role in decision making since the company knows how much to spend for
a particular budgeting period.

Master Budget

A master budget is a comprehensive overview of all the other individual budgets that are drafted in the
company. This is the budget that is presented to the executive committee of the company for review at
the beginning and the end of every budgeting period. Every company must prepare a master budget in
order to measure its relevance in terms of financial performance. A master budget plays a significant
role in decision making for a company. It provides all the information regarding the financial activities of
the company and the company’s projected financial position for the specific budgeting period. Another
important role of master budgets is to keep the managers in the organization aligned (Kimmel et al.
2010). It reflects on all departmental performances for the budgeting period. These projections help to
determine the performance of managers in the company, how they could perform in the future, and
what they could d to improve their performance. Therefore, all companies must come up with a
comprehensive master budget in order to remain objective about their financial health.

References

Kimmel, P.D., Weygandt, J.J. & Kieso, D.E. (2010). Financial Accounting: Tools for Business

Decision Making. New Jersey: John Wiley & Sons.

Penner, S.J.(2004). Introduction to Health Care Economics &

Financial Management: Fundamental Concepts with Practical Applications.
New York: Lippincott Williams & Wilkins.

Wedyan, L.M.A., Jaradat, M.M.F. & Bshayreh, M.M.M. (2016). The Importance of Operating

Budgets in Estimating the Revenues and Expenses in the Industrial Companies Operated in the

Aqaba Special Economic Zone Authority. International Journal of

Accounting and Financial Reporting, Vol. 6,

No. 2.