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ACCA Applied Knowledge · Management Accounting · Nature and purpose of budgeting

Which of the following is the correct order in which a typical manufacturing company would prepare its budgets when sales demand is the principal budget factor?

Sales is budgeted first, then production, then materials usage and purchases, and finally the cash budget. Each later budget depends on the earlier ones, and the cash budget is prepared last because it summarises the cash effect of all other budgets.

  1. ASales, production, materials usage and purchases, then cash budgetCorrect
  2. BProduction, sales, cash budget, then materials purchases
  3. CCash budget, sales, production, then materials purchases
  4. DMaterials purchases, production, sales, then cash budget

Explanation

When sales demand is the limiting factor, the sales budget comes first. Production follows, since output depends on sales plus inventory changes. Materials usage and purchases then follow from production, and the cash budget comes last because it summarises the cash effects of all other budgets. The other orders put dependent budgets before the budgets that drive them.

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