Variable and Fixed Factory Overhead

Term Project    Accounting 1C    Spring 2018
Overview of the Budget Process:
Budgeting is a criticaltask in planning and operating a successful company.  Firms often
prepare detailed budgets for the coming year, and less‐detailed budgets for the
following two to five years (and sometimes ten years).   Budgetsstretching out three or
more years are part of a company’s strategic planningprocess because they reflect
long‐term goals for the firm. Longer range budgets, strategic planning,should be
frequently reviewed and updated, as new informationbecomes available, either new
information on past performance, or information on new market trends/cost trends.
Budgetsset targets for sales, then project costs and ultimately produce pro forma
financialstatements, i.e. income statement, balance sheet, and cash flow.  This
informationis usedto addressinvesting in capital equipment and financingneeds.
Participating in the budget process encourages employees to carry out the plans set
forth in the budget.They are more likely to work enthusiastically toward meeting the
goals if they have input in setting the goals.  The budget process should provide an
opportunity for thoughtful exchange between upper managementand those responsible
for the day‐to‐day operations. Employeesmust feel that goals are reasonable and
obtainable. Management must review the overall budget to resolve any conflicts
between top down budgets (what management thinks) and bottom up budgets (what
the workers think).
Most companies prepare very detailed budgets in the short term.  Detailed budgets can
be divided intomonthly (or quarterly forecasts). Monthly budgets are often used to
evaluate department, division, cost center, or individual performance.   Think of a
grocery store.  There are often revenue and cost budgets, and related performance
reports, for the bakery, deli, meat, produce, and grocery departments.
Often the starting point in the budgeting process is to forecast industry sales, then
estimate the firm’s portion of the market, based on past trends, possible new products
to be introduced, and anticipated competitor actions.  For this project, we first calculate
the budgeted sales.  Then step by step we calculate the various line items of the income
statement (think “transactions”), looking at all the cost and expense elements, including
the variable and fixed costs.  Then calculate the line items of the balance sheet,
incorporate inventory turnover, collection of receivables, payables, etc, then the cash
flow statement.   An integral part of the budget, often requiring multiple cycles, is to
budget/forecast the needed capital equipment and financing (think of the cashflow
statement sections of operations, investing, finance).


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