This chapter describes the budgeting process and shows how the various operating budgets relate to each other. The sales budget is the foundation for profit planning. Once the sales budget has been set, the production budget and the selling and administrative expense budget can be prepared since they depend on how many units are to be sold. The production budget determines how many units are to be produced, so after it is prepared, the various manufacturing cost budgets can be prepared. All of these budgets feed into the cash budget and the budgeted income statement and balance sheet. The parts of the master budget are connected in many ways. For example, the schedule of expected cash collections, which is completed in connection with the sales budget, provides data for both the cash budget and the budgeted balance sheet.

The material in this chapter is just an introduction to budgeting and profit planning. In later chapters, we will see how budgets are used to control day-to-day operations and how they are used in performance evaluation.

Understand why organizations budget and the processes they use to create budgets.

Prepare a sales budget, including a schedule of expected cash collections.

Prepare a production budget.

Prepare a direct materials budget, including a schedule of expected cash disbursements for purchases of materials.

Prepare a direct labor budget.

Prepare a manufacturing overhead budget.

Prepare a selling and administrative expense budget.

Prepare a cash budget.

Prepare a budgeted income statement.

Prepare a budgeted balance sheet.