A budget is a formal written summary (or statement) of management's plans for a specified future time period, expressed in financial terms. Business enterprises use budgets in planning and controlling their operations. Planning is the process of establishing enterprise objectives. A successful organization establishes both long-term and short-term plans that set forth the objectives of the company and the proposed means of accomplishing them. In this chapter, we consider the role of budgeting as a planning tool of management. Budgeting as a control device will be discussed in Chapter 24.


  1. Indicate the benefits of budgeting. The primary advantages of budgeting are that it (a) requires management to plan ahead, (b) provides definite objectives for evaluating performance, (c) creates an early warning system for potential problems, (d) facilitates coordination of activities, (e) results in greater management awareness, and (f) motivates personnel to meet planned objectives.
  2. State the essentials of effective budgeting. The essentials of effective budgeting are (a) sound organizational structure, (b) research and analysis, and (c) acceptance by all levels of management.
  3. Identify the budgets that comprise the master budget. The master budget consists of the following budgets: (a) sales, (b) production, (c) direct materials, (d) direct labor, (e) manufacturing overhead, (f) selling and administrative expense, (g) budgeted ...

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