Our purpose has been to present an overview of the budgeting process and to show how the various operating budgets relate to each other. We have seen how the sales budget forms the foundation for profit planning. Once the sales budget has been set, the production budget and the selling and administrative budgets can be prepared since they depend on how many units are to be sold. The production budget determines how many units are to be produced, so after it is prepared, the various manufacturing cost budgets can be prepared. All of these various budgets feed into the cash budget and the budgeted income statement and balance sheet. There are many connections between these various parts of the master budget. For example, the schedule of expected cash collections, which is completed in connection with the sales budget, provides data for both the cash budget and the budgeted balance sheet.
The material in this chapter is just an introduction to budgeting and profit planning. In later chapters, we will see how budgets are used to control day-to-day operations and how they are used in performance evaluation.
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