budgeting begins with zero dollars and then adds to the budget only revenues and expenses that can be supported or justified

adjusted monthly, and a new month is added as each month passes.

To create these budgets we use information such as the standard quantity and standard price for raw materials that need to be purchased, the standard direct labour rate and the standard direct labour hours that need to be scheduled, and the standard costs for all other direct and indirect operating expenses

The sales budget is the foundation for other operating budgets.Management uses the number of units from the sales budget and the company’s inventory policy to determine how many units need to be produced. This information in units and in dollars becomes the production budget.

The production budget is then broken up into budgets for materials (variable costs used to manufacture the item), labour (variable cost), and overhead (fixed costs that support manufacturing-rent, costs to maintain machines, power to run machines).

knowing how many units are to be produced and how much inventory needs to be on hand is used to develop a direct materials budget.

the necessary hours of direct labour and the estimated labour rate are used to develop the direct labour budget.

overhead budget other factory costs that are not included in direct materials and labour. These are variable and fixed.

existing information regarding fixed manufacturing costs are combined with variable manufacturing costs to determine the manufacturing overhead budget

the information from the sales budget is used to determine the sales and administrative budget ehich includes the variable and fixed selling and administration costs for the business.

the sales, direct materials, direct labour, fixed manufacturing overhead budget, and sales and administrative budgets are used to develop a pro-forma income statement