Accounting for Managers.

Q8
Ans:- The master budget is the aggregation of all lower-level budgets produced by a
company's various functional areas, and also includes budgeted financial
statements, a cash forecast, and a financing plan. The master budget is typically
presented in either a monthly or quarterly format, and usually covers a company's
entire fiscal year.
Cash Budgeting is the process of making estimate which involve the movement of
cash. It can either be cash paid and cash received within a specified period. A very
good cash budgeting will show CASHFLOW for the period under review. Master
Budgeting is the estimate that entails all other budgets likes cash, raw material,
production, sales, purchases,marketing and administrative budgeting. Master
budgeting is always in a summarised form while individual budget gives clearer
view.

(a) First-in, First-out (FIFO): Under FIFO, the cost of goods sold is based upon the
cost of material bought earliest in the period, while the cost of inventory is based
upon the cost of material bought later in the year. This results in inventory being
valued close to current replacement cost. During periods of inflation, the use of FIFO
will result in the lowest estimate of cost of goods sold among the three approaches,
and the highest net income.
(b) Last-in, First-out (LIFO): Under LIFO, the cost of goods sold is based upon the
cost of material bought towards the end of the period, resulting in costs that closely
approximate current costs. The inventory, however, is valued on the basis of the
cost of materials bought earlier in the year. During periods of inflation, the use of
LIFO will result in the highest estimate of cost of goods sold among the three
approaches, and the lowest net income.
(c) Weighted Average: Under the weighted average approach, both inventory and
the cost of goods sold are based upon the average cost of all units bought during
the period. When inventory turns over rapidly this approach will more closely
resemble FIFO than LIFO.
and
as per Accounting Standard of ICAI (AS-2), inventory cost should comprise of all cost
of purchases, cost of conversion and other costs incurred in bringing the inventories
to the present location and condition. Cost of purchases should be exclusive of
duties which are recoverable from the taxing authorities. (e.g. Cenvat). Inventory
should be valued at lower of cost or net realisable value.Inventory should be valued
on FIFO (First in First Out) method or weighted average method. [LIFO is not
permitted]. The AS-2 has been made mandatory w.e.f. 1st April, 1999