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BUS 630 week 4 Assignment Chester & Wayne




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BUS 630 Week 4 Budgeting and Controlling Cost
Budgeting, and Controlling Costs
Ashford University
Managerial Accounting – BUS 630
Budgeting and Controlling Cost
Budgeting is an essential tool for the successful management of any
company. It’s a way for upper management to communicate its plans
and intentions to the entire company. The budget is their plan for
success. According to Noreen, Brewer, and Garrison (2011) it is a
quantitative plan for acquiring and using resources over a specified time
period. The budget process can seem like a tedious exercise for some,
as it involves and affects all areas of the company, but in the end it
enables a company to plan how it will achieve revenue goals and control
costs. In the simplest of terms the budget explains how much the
company should be spending to produce a predetermined about amount
of product which will yield a desired profit. Through the budgeting
process and the controlling of costs many company’s like American
Airlines, are able to keep their costs at a minimum and profits as high as
A company’s master budget is actually made up of a collection of smaller
budgets that detail the company’s sales, production and financial goals.
These smaller budgets consist of a sales budget, a production budget or
an inventory of merchandise purchases budget, a direct materials
budget, a direct labor budget, a manufacturing overhead budget, an
ending finished goods inventory budget, a selling and administrative
expense budget, and a cash budget. The information obtained from
these budgets come together to make up the budgeted income
statement and the budgeted balance sheet.
The sales budget shows the expected sales for the period. Noreen et all
(2011) tells us that an accurate sales budget is the key to the entire
budgeting process. The task of determining accurate budget sales

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numbers us done through the use of a sales forecast which analyzes
previous years sales, how volatile the market is, and the competition. It
also details a schedule of expected cash collections. This schedule
details the expected collections on credit sales made in prior and current
budgeted periods. The information is also used to prepare the cash
After the sales budget is established the production budget can be
completed. The sales budget will determine how many units must be
produced. The production budget simply determines how much
additional inventory must be produced when taking into account the
current inventory. It’s important to make an important distinction at this
point. Manufacturing companies make production budgets while
merchandising company’s make merchandising purchases budget. In
essence their purpose is the same; they both determine how much
additional inventory is needed to meet the sales projections.
After the predicted level of sales is determined and how many units must
be produced to meet the expected demand, we can begin to look at
what costs can be expected to produce the required number of units.
A direct materials budget is set to establish the amount of raw materials
that must be purchased to produce the required units. This budget also
includes a schedule of expected cash disbursements for raw materials.
This schedule includes payments for purchases on account in prior and
current budget periods. The compiled information is also used in the
overall cash budget.
A direct labor budget is also established to determine the cost of the
labor for the required level of production. Determining these costs also
include making decisions on the size of workforce needed during
production times and enables the company to plan for increases and
decreased in labor needs.
Next the manufacturing overhead budget is completed. This budget
includes variable and fixed manufacturing overhead cost. As variable
cost will change relative to the level of activity, it is important to note that
fixed cost can work for or against a company depending on how
accurately they are determined. An example of this would be capacity
fixed cost. If a manufacturer expected demand to be higher than their
capacity, they will have to raise fixed cost in order to be able to meet the
expected demand. Once these fixed costs are increased they will stay at

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