Analyzing the Master Budget Simulation.

Essay by DANIMAL69University, Bachelor'sA+, November 2005

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A. An increase in sales does not necessarily mean that there is a rise in material or labor cost. We must know what the inventory level is at the particular time of the rise in sales. If the inventory levels do not permit or coincide with the sales figures, we can assume that there is some rise in certain costs; such as direct labor. The rise in costs would be direct labor depending on what the output or the maximum capacity rating (MCR). If the increase in sales rises, is the company able to produce these products in the normal time? On the other hand, must they work overtime to adjust for the sales increase? In the case of Salud Foods, the sales increased $450,000; which inevitably led to an increase in labor by 20%.

B. The financial manager's task is to forecast future sources and uses of cash. These forecasts serve two purposes.

First, they alert the financial manager to future cash needs. Second, the cash flow forecasts provide a standard, or a budget, against which subsequent performance can be judged (Brealey, Myers, and Marcus). The accuracy in the budgeting process is only as good as the forecaster information provided. As with the Salud Foods company, they had at least three people involved in the budgeting decisions, who were all from different divisions so that we could ensure fair concise input to the accuracy of the budget.

C. A Company's budget can be hidden from certain costs if the planning and forecasting took into account some of the issues that may arise during a certain period. Example with Salud Foods, their sales in creased, they knew this ahead of time and had to budget for that issue. Some of the issues that they did not count on was the...