X.+Module+6000+Summary+and+Conclusions

=X. Module 6000 Summary and Conclusions ldm=

**__Summary:__**

Planning for the future is one of the most critical tasks all organizations face. Budgeting is an extremely important tool used to make quantitative plans (both physical and financial) for the future. Budgets contain estimates of costs, revenues, and resources which are used in creating action plans to meet the strategic objectives of an organization during a specified time period.

A company’s master budget is composed of the operating budgets and the financial budgets. The components of the operating budget are as follows:
 * 1) Sales budget – estimates sales for the company.
 * 2) Production budget – estimates units needed to meet sales goals.
 * 3) Direct materials purchases budget – estimates materials needed to meet production goals.
 * 4) Direct labor budget – estimates direct labor hours and direct labor cost needed to meet production goals.
 * 5) Overhead budget – estimates fixed and variable costs of overhead.
 * 6) Ending finished goods inventory budget – calculates unit cost which is needed to calculate cost of goods sold.
 * 7) Cost of goods sold budget – estimates the cost of selling the number of units forecast in the sales budget.
 * 8) Marketing expense budget – estimates cost for selling and distribution.
 * 9) Administrative expense budget – estimates overall expenses for the operation of the company.
 * 10) Research and development expense budget – estimates costs for research and development.

As you can see above, each of these budgets builds off of one another, and can be combined to create a budgeted income statement. A budgeted income statement is critical to a company because it provides an estimate of operating income.

The second part of the master budget, the financial budgets, includes:

1. The budget for capital expenditures – detailed plan for acquiring capital assets over a period of time. 2. The cash flow budget – Summarizes cash inflows and cash outflows over a period of time. 3. The budgeted balance sheet – details the expected financial position of the company for the upcoming year. 4. The budgeted statement of cash flows – looks at changes in cash flows over a longer period of time.

As is the case with the operational budgets, the different components of the financial budgets are also dependent on one another.

The cash flow budget is a critical element to a company’s planning process. The cash flow budget deals with all of the cash that flows in and out of a company. There are five main sections to the cash flow budget:
 * 1) Total cash available – beginning cash balance and expected cash receipts.
 * 2) Cash disbursements – lists all planned cash outlays for the period.
 * 3) Cash excess or deficiency – compares cash available with cash needed.
 * 4) Financing – consists of debts and payments made on debts.
 * 5) Cash balance – planned ending cash balance.

Since budgeting is dynamic, the cash flow budget should be updated as new information becomes available so that better plans can be created.

Flexible budgeting and activity based budgeting are also budgeting tools companies use for planning and control. Flexible budgeting can be very beneficial to companies because it provides budget estimates based on differing levels of activity. This allows a company to plan by showing what its costs will be at each of these activity levels. This is different from a static budget which is created based on only one level of activity. Using flexible budgets, managers can examine several different scenarios before making decisions. Additionally, flexible budgets can be prepared based on a company’s actual level of activity. This budget can then be compared with actual costs to determine where variances exist. A company can use this to increase performance by determining where problems exist and making efforts to correct them.

Activity based budgeting starts with firm’s activities and then works backwards to determine what resources are necessary to create those activities.

The final considerations in budgeting are the behavioral dimensions. Budgets tend to work better as performance measures when they are combined with incentives (monetary or nonmonetary), feedback, and realistic standards. Participative budgeting can also be a good budgeting tool because it allows lower level managers to have a voice in the creation of the budget which usually results in greater goal congruence.