“A ltd is a manufacturing company that has no production resource limitations for the foreseeable future. The Managing Director has asked the company mangers to coordinate the preparation of their budgets for the next financial year. In what order should the following budgets be prepared? (1) Sales budget (2) Cash budget (3) Production budget (4) Purchase budget (5) Finished goods inventory budget”

The correct answer is: C. (1), (4), (5), (3), (2)

The sales budget is the first budget to be prepared because it is the basis for all other budgets. The production budget is prepared next, based on the sales budget. The purchase budget is prepared after the production budget, as it is necessary to know how much material will be needed to produce the required number of units. The finished goods inventory budget is prepared last, as it is necessary to know how much finished goods inventory will be needed to meet customer demand.

Here is a more detailed explanation of each budget:

• Sales budget: The sales budget is a forecast of sales for the coming year. It is prepared by estimating the number of units that will be sold and the price per unit. The sales budget is the basis for all other budgets because it determines the level of production, purchases, and expenses.
• Production budget: The production budget is a forecast of the number of units that will be produced in the coming year. It is prepared by taking the sales budget and adjusting it for inventory levels. The production budget is necessary to determine the amount of materials and labor that will be needed.
• Purchase budget: The purchase budget is a forecast of the amount of materials that will be purchased in the coming year. It is prepared by taking the production budget and multiplying it by the amount of materials needed per unit. The purchase budget is necessary to determine the amount of money that will be spent on materials.
• Finished goods inventory budget: The finished goods inventory budget is a forecast of the amount of finished goods that will be on hand at the end of the coming year. It is prepared by taking the sales budget and subtracting the amount of sales that are expected to be made in the last month of the year. The finished goods inventory budget is necessary to determine the amount of money that will be tied up in inventory.

The order in which the budgets are prepared is important because each budget builds on the previous one. The sales budget is the foundation for all other budgets, and the other budgets cannot be prepared until the sales budget is complete.