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Text 10. What types of budgets do companies prepare?

The type of budgets prepared by a particular company depends on the time horizon and the nature of the business activities under consideration. The time horizon considered is a continuum between strategic and operational budgets, while the na­ture of the business activities determines whether there is a need for a project or master budget.

A strategic budget, also known as a forecast, is typically prepared for a 5- to 10-year period. This type of budget considers the long-term planning of the company and is usually more general in nature than an operating budget. A strategic budget considers questions such as: Should the company ex­pand its product lines? Should it change its inventory policy? Should the company expand its markets?

In contrast, an operational budget is prepared for a much shorter period of time, typically, a year or less. An operational budget is more specific than the strategic budget. It considers questions such as: How many units should the company produce this year? How much does the company expect to spend on material purchases this year? How much labor cost is expected this year? Operating budgets are related to strategic budgets because the operating budget is the current plan for achieving the long-term goals and objectives of the company.

Project budgeting is the process of ascertaining the specific resources provided by, and needed for, a specific project or activity. Often companies need to budget a par­ticular project to determine whether it should be undertaken or to determine a bid price in a contracting situation. A company uses a project budget to determine what subset of the company's resources is necessary to complete the project. A project budget may be long term or short term in duration, but it considers only the re­sources required for one particular project.

In contrast, master budgeting is the process of compiling all the budgets pre­pared during the revenue, conversion, and expenditure cycles that culminates with the cash budget and pro forma financial reports. The sales budget is related to the production budget, selling and administrative costs budget, and cash receipts schedule as well as the pro forma financial reports. The production budget, in turn, is related to the direct materials budget as well as the direct labor and manufacturing overhead budget. These budgets, in turn, are related to the cash disbursements schedule and the pro forma financial reports. The selling and admin­istrative costs budget, which flows from the sales budget, is related to the cash dis­bursements schedule and the pro forma financial reports. Finally, the cash receipts and cash disbursements schedules along with the planned financing and investing cash flows become input for the cash budget and the related amount shown on the pro forma balance sheet.

Література:

  1. Ainsworth D. Introduction to Accounting: An Integrated Approach. – V.1. Chapters 1-13, 1997/ - 480 p.

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  5. www. AgriWorld.nl

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