A good budgeting system assists management in reaching their goals through the planning and control of cash inflows through revenue and financing and outflows through payment and expenses.
There are various budgeting strategies including bottom-up, top-down, and zero-based budgeting.
A static budget is prepared at one level of activity, while a flexible budget allows the variable expenses to be adjusted for various levels of activity.
A master budget includes the subcategories of operating budgets and financial budgets.
A master budget is developed at the estimated level of activity.
The sales budget is the first budget developed, and the estimated sales in turn guide the production budget.
The production budget shows the quantity of goods produced for each time period and leads to computing when and how much direct material needs to be ordered, when and how much labor needs to be scheduled, and when and how much manufacturing overhead needs to be planned.
The sales and administrative budget plans for the nonmanufacturing expenses.
All operating budgets combine to develop the budgeted income statement.
The financial budgets include the capital asset budget and the cash budget. The cash collections schedule and cash payments schedule are computed and combined with the other budgets to develop the cash budget.
Information from the other budgets and the budgeted income statement are used to develop the budgeted balance sheet.
A master budget and related budgets are prepared as static budgets for the estimated level of activity.
A flexible budget adjusts the budgets for various levels of activity and allows for the actual results to be evaluated at the actual volume of activity.