Materials Purchase Budget

We use the following relationship to forecast material purchase requirements:

• Required purchases in units= Materials to be used in production + Budgeted ending inventory- Budgeted beginning inventory

Ending Inventory and Production Budgets

We use the following relationship to forecast production requirements:

• Required production in units= Budgeted sales in unites + Budgeted ending inventory – Budgeted in beginning inventory

Sales Budget

The sales budget is the basis for all other budget components.
Units to be sold are a function of the forecasted selling price.
The budget requires a forecast of sales, typically involving sales staff and market research.  Various statistical techniques may also be used.  Sales may be forecasted in units and in dollars.
Budgeted revenues can be computed as:

• Forecasted sales (in units) x Forecasted selling price.

What is a Budget?

A budget is a detailed plan for the acquisition and use of financial and other resources over a specified period of time.  Good budgeting practice should provide for both planning and control.

Types of Fixed Costs

Committed fixed costs - relate to the investment in facilities, equipment, and the basic organizational structure of the firm.  Examples include depreciation of buildings and equipment, taxes on real estate, insurance, etc.

What is Value Chain Analysis?

The value chain for any firm in any business is the linked set of value-creating activities all the way from basic raw material sources for component suppliers through to the ultimate end-use product delivered into the final customers’ hands.

The value-chain focus of management today is largely internal to the firm (its purchases, its processes, its functions, its products, its customers).  This perspective is too narrow if considered in a strategic context.

Strategic/competitive advantage is gained through managing the entire value chain from raw material supplier to the end user.

Definition of Management Accounting

Management needs detailed information on different aspects to arrive at meaningful decisions. Financial accounting provides some information but these are not adequate. Management accounting removes these limitations of financial accounting. 

What is Cost Drivers

Cost driver - any factor whose change causes a change in the total cost of a related cost object; more simply, any factor that causes costs.

We assume a causal relation exists between the use of the cost driver and the incurrence of the cost.

Functions of Management Accounting

Functions of Management Accounting include followings:

• Provides data
• Modifies Data
• Analysis and interpretation of data
• Use of Qualitative Information also
• To help in Planning
• To help in Organising
• To help in Motivation
• To help in Co-ordination
• Communication
• To help in Control
• To help in Decision Making

Objectives of Management Accounting

• Providing managers with information for decision making and planning.
• Assisting managers in directing and controlling operational activities.
• Assisting managers in motivating employees toward the organization’s goals.
• Measuring the performance of subunits, managers, and other employees within the organization.