The primary purpose of any company is to maximize profits at the lowest possible cost (VanDebeck, 2010). To accomplish this objective, budgets must meet several requirements, including realistic and achievable goals (VanDebeck, 2010). For instance, if a mobile phone manufacturer …show more content…
338). There can be occasions where the market is volatile that can result in resource constraints (McConaty, 2015). Therefore, corporations should have an effective process that can assess the cause of a new development and modify budgets to reflect the change (McConaty, 2015).
Effective budgeting provides planning and control that benefits businesses (Garrison, Noreen, & Brewer, 2012). For example, Garrison et al. (2012) stated that “the budgeting process provides a means of allocating resources to those parts of the organization where they can be used most effectively” (p. 343). Resources are allocated based on opportunity cost, which is a choice of options while making a decision (Boyd, 2012).
In addition, firms can benefit from budgeting because it provides a benchmark to evaluate performance (Garrison et al., 2012; Horngren, Harrison, & Oliver, 2012). “In most companies, part of the manager’s performance evaluation depends on how actual results compare to the budget” (Horngren et al., 2012, p. 1053). Thus, budgets will help define organizational and personal goals for the employees in the corporation (Needles, Powers, & Crosson, …show more content…
A Financial budget “focuses on how operations and planned capital outlays affect cash” (Horngren, Datar, & Rajan, 2012, p. 189). Therefore, a cash budget is produced to estimate receipts and disbursements during a projected budgeting period based on estimates from sales and expenses reports (Needles et al., 2011; VanDebeck, 2010).
Garrison et al. (2012) noted that there are four main categories to the cash report: receipts, disbursements, excess or deficiency, and the financing section. The receipts portion of the cash budget lists all receipts (not from financing) that are expected during an accounting period (Garrison et al., 2012). For instance, proceeds from cash sales, collections on credit sales, interest income, and dividends from investments are examples of receipts that would be found in the cash budget (Needles et al., 2011).
Furthermore, the disbursements section of the cash budget outlines all cash outlays that are planned for the accounting period (Garrison et al., 2012). Purchases of materials, direct labor, overhead expenses, and other costs are examples that will be contained in the disbursement section of the cash budget (Needles et al., 2011). Moreover, other cash payments such as purchases on administrative expenses and income tax repayments are listed in the disbursement section (Needles et al.,