A budget encourages planning, coordinates functions within an organisation, acts as a form of communication, provides a basis for responsibility accounting (where an entity is structured into strategic units and the performance is measured in terms of accounting results), provides a control mechanism, authorises expenditure and motivates employees. The budget process is the sequence of operation necessary to produce a budget for a particular organisation with the sequence depending on the perceived requirements for planning and control.
Consideration is giving to operating decsions which involve all levels of the production cycle. The typical stages are product managers negotiate with production managers who negotiate with prodction directors and then the board of directors. Participative budgeting is where lower-level managers are involved in the process of establishing the budget.
The usual (and legal) period is one year. However the budget period can be broken down to whatever period is required. Usually there is a link between the information in the budgets and the annual accounts; a firm's budget nomrally includes the planned total sales for the period whereas the annual accounts show the actual sales.
The master budget usually consists of the budgeted income statement and balance sheet which represents a summary of individual functional budget of the organisation as a whole. The master budget sets out the objectives and targets consisting of sales, production, administratin, distribution and cash budgets.
Sales and production budgets reflect the respective targets for these functions. The summation of these budgest is emodies within the overall income statement and balance sheet. They are also the source for the overall cash budget.
Budgets can be calculated in units and monetary terms.
Production + Opening Inventory = Sales + Closing Inventory or Sales + Closing Inventory - Opening Inventory = Production
Budgets can be calculated for material costs per unit manufactured and sold and for labour costs to determine profitability of products sold and for inventory valuation, and to detect if there is wastage in the production process or inefficiency in labour. Further budgets can also be developed for overhead costs to track planned overhead costs and support items.