Budget Preparation

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  • #230392
    Stylianos Vourderis
    Participant

    Hello,

    i am a little confused about the preparation of budget

    We start with sales forecast and then

    1. continue with production budget, material budget e.t.c. using standard costing or
    2. continue with FFS method ?
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  • #230401
    Lynn Roden
    HOCK international

    Hello Stylianos Vourderis,

    Preparation of the master budget (beginning with the sales budget, and so forth) is a totally different thing from preparing a pro forma financial statement (using the FFS method).

    The master budget is developed for each responsibility center separately and then the responsibility center budgets are all rolled up to the consolidated master budget. The consolidated master budget is a formal document. Once it has been approved, the budgeted amounts are usually input into the automated accounting system in the budgeting module, responsibility center by responsibility center, account by account, for each month of the coming year. Then throughout the year, the actual results are compared with the master budget amounts (and/or flexible budget amounts), and variance reports are prepared. There are usually formatted reports in the automated accounting system that are produced each month for each responsibility center and for the consolidated company, comparing the actual results to the budgeted amounts and calculating variances. But human beings must get involved to determine the causes of the variances and prepare the actual variance reports that go to senior management.

    Pro forma financial statements are used for a totally different purpose. They do not affect the master budget as it has been input in the budgeting module of the accounting system. Pro forma financial statements may be prepared for one segment of a business if, for example, a capital spending program is being considered for that segment, in order to get an idea of what effect it may have on that segment. Or, they may be prepared for the whole company for some other purpose, for example to forecast cash requirements. They are not formal budgets, and they are not prepared for every responsibility center and then consolidated like the master budget financial statements are. Pro forma financial statements are used for “ad hoc” planning purposes.

    Does that help?

    Lynn

    #230408
    Stylianos Vourderis
    Participant

    But still both  highlight the need for bank loans or equity issuance if there is a deficit or cash investment if there is a cash excess.

    Isn’t it that so ?

    #230409
    Lynn Roden
    HOCK international

    Hello Stylianos Vourderis,

    It is possible that both could lead to information about that. But they are still different things and are used for completely different purposes.

    Lynn

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