The term “budget” is actually a shorthand term to describe a variety of budget documents. All of these documents are combined into a master budget. The master budget is a set of interrelated budgets that constitutes a plan of action for a specified time period.
The master budget contains two classes of budgets. Operating budgets are the individual budgets that result in the preparation of the budgeted income statement. These budgets establish goals for the company’s sales and production personnel. In contrast, financial budgets are the capital expenditure budget, the cash budget, and the budgeted balance sheet. These budgets focus primarily on the cash resources needed to fund expected operations and planned capital expenditures.
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- Direct labor quantity standard
The direct labor quantity standard is the time that should be required to make one unit of the product. This standard is especially critical in labor-intensive companies.
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- Equivalent units of production
Equivalent units of production measure the work done during the period, expressed in fully completed units. This concept is used to determine the cost per unit of completed product.
- Market interest rate
Market interest rate is the rate investors demand for loaning funds to the corporation.
- Standard predetermined overhead rate
Standard predetermined overhead rate is an overhead rate determined by dividing budgeted overhead costs by an expected standard activity index.
- Stock splits
A stock split, like a stock dividend, involves issuance of additional shares to stock holders according to their percentage ownership.
- Contra-revenue account
Contra-revenue account is an account that is offset against a revenue account on the income statement.