Which of the following statements about budgets is true?
a. The direct labor budget uses an average wage rate for direct labor.
b. The overhead budget is typically composed of variable overhead and fixed overhead.
c. The production budget is not converted into dollars.
d. All of these choices are correct.
The correct answer and explanation is:
The correct answer is d. All of these choices are correct.
Budgets are an essential part of business planning, helping companies allocate resources efficiently and set targets for financial performance. Each type of budget serves a specific purpose, and the statements provided address common practices in budget preparation.
- Direct Labor Budget Uses an Average Wage Rate (a): The direct labor budget estimates the cost of direct labor needed to produce a certain amount of goods. It typically uses an average wage rate because labor costs can vary due to factors like overtime, different job roles, or skill levels. This simplifies the budget calculation and ensures consistency in financial planning.
- Overhead Budget Composed of Variable and Fixed Overhead (b): The overhead budget accounts for both fixed and variable overhead costs. Fixed overhead remains constant regardless of production levels (such as rent or salaried staff), while variable overhead fluctuates with production volume (such as utilities or materials). This division is important because it helps managers understand how costs behave at different levels of production, allowing for more accurate forecasting.
- Production Budget Not Converted into Dollars (c): The production budget outlines the number of units to be produced, but it does not convert this into dollar amounts. Instead, it focuses on quantities, specifying how many units of raw materials, labor hours, and overhead are needed to meet production targets. The conversion into dollars happens later in the process when other budgets (such as the direct materials, direct labor, and overhead budgets) are prepared.
Since all these statements describe standard practices in budget preparation, the correct answer is d. All of these choices are correct.