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

Which of the following is the correct sequence of the early steps in preparing a functional budget when sales demand is the principal budget factor?

Sales budget first, then production budget, then materials usage budget, then materials purchases budget. When sales demand is the principal budget factor, every other budget is derived from the sales budget, with usage coming from production and purchases coming from usage adjusted for inventory.

  1. AProduction budget, sales budget, finished goods inventory budget, materials usage budget
  2. BSales budget, production budget, materials usage budget, materials purchases budgetCorrect
  3. CMaterials purchases budget, materials usage budget, production budget, sales budget
  4. DSales budget, materials purchases budget, production budget, materials usage budget

Explanation

When sales is the limiting factor, the sales budget is prepared first. Production requirements follow, adjusted for inventory changes. Materials usage is derived from production, and purchases are derived from usage adjusted for material inventory changes. The other orders reverse this logic.

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