Cost, budgeting, and variance
The Budget Build
Sales drives everything: run the master-budget sequence, adjust each layer for inventory, and keep depreciation out of the cash budget.
How the exam words it
- -The stem asks which budget comes first, or to place the components of the master budget in order.
- -It gives unit sales with beginning and desired ending inventory and asks how many units to produce or how much material to buy.
- -It gives a collection lag by month and asks for a period's cash collections or ending cash balance.
- -It contrasts a static and a flexible budget or asks what a flexible budget restates.
The playbook
- 1Work in master-budget order: the sales budget drives production, then materials, labor, and overhead, then the cash budget, then the pro forma statements.
- 2Apply the inventory adjustment at each layer: units to produce equal sales plus desired ending inventory minus beginning inventory, and repeat it to convert production into material purchases.
- 3Schedule collections by applying the lag percentages to each month of sales, then build the cash budget as beginning cash plus collections minus disbursements.
- 4Keep the cash budget on a cash basis: depreciation and other non-cash items never appear, and a flexible budget uses budgeted unit costs at the actual volume.
The trap
Setting production equal to sales, or letting depreciation into the cash budget. Production adjusts for the inventory change, and the cash budget is strictly cash basis.
How the exam varies it
The same pattern, re-skinned along these axes:
Master-budget sequence versus a single budget computationProduction budget versus materials-purchase budgetCash collections schedule versus static versus flexible budget
Drill this pattern
8 questions of The Budget Build from across the AUD topics. Clear it by getting 5 right with a streak of 3.