1Why do companies create budgets and what is the importance

1.Why do companies create budgets and what is the importance of budgets? How do budgets help businesses?

2.What is a Master Budget? Please describe its contents and talk about the relationships between those contents.

Solution

1. Companies creates budgets to measure its performance during a said period. Budgets are helpful as a corrective measure. When the budgeted figures are compared with the actuals, we would get the variances whether the performance of the company is favorable or adverse. Budgets do help with variance analysis, in determining predetermined overhead rate for application of manufacturing or fixed overhead to its products etc.

2. Master Budget comprises of several budgets which the company prepares. It contains, Sales Budget, Production Budget, Direct Materials Budget, Direct Labor Budget, Overhead Budget, Cost of Goods Sold Budget and Budgeted Income Statement.

Based on budgeted sales, budgeted production can be determined. Based on Budgeted production, budgeted direct materials requisition can be known. Based on production budget, Direct labor budget and overhead budget can be drawn.

Based on all the above budgets, cost of goods sold budget and budgeted income statement can be prepared.