Question

When creating a master budget, the accountant should include a list of assumptions. Explain why this list is important and provide a sample assumption.

Answer 1

Defining assumptions in master budget is important since it will impact the output of each budget. Assumptions help in understanding how numbers are derived for each budget and its impact on subsequent budget. For example: assumption regarding credit sales collection will have an impact on cash budget

Sample assumption list:

· Selling price of products sold

· Cash sales and credit sales proportion

· Collection of credit sale in each month

· Payment for purchases of material in each month

· Finished goods and direct material inventory