Management Accounting: Budgeting
Budgets are prepared in a logical sequence: sales, production, materials, labour, overheads, then cash and master budget. Candidates must construct functional budgets and flex them to actual activity. Key techniques: production budget = sales units + closing inventory − opening inventory; materials purchases = usage + closing stock − opening stock; labour hours from standard hours per unit; overhead absorption using predetermined rates.
Cash budgets are the most examined area. Include only cash movements: receipts from credit customers per the collection pattern, payments to suppliers per payment terms, wages, overheads paid, capital expenditure, tax and dividends. Exclude depreciation, bad debts written off and accruals not yet paid. Opening cash plus net cash flow gives closing cash; a negative balance means a loan or overdraft is needed.
Traps: confusing profit with cash; forgetting the lag in debtor and creditor patterns; mixing units and values; not adjusting fixed overheads for volume in a flexed budget. Behavioural aspects - participation, top-down versus bottom-up, zero-based versus incremental - appear in written questions.
Worked example: sales 5,000 units, opening inventory 400, closing 600, so production = 5,000 + 600 − 400 = 5,200 units. If each unit uses 3 kg at £2/kg, materials usage = 15,600 kg = £31,200.