The production manager of the company for which you are an assistant accountant has recently sent you the following memorandum:

To: Assistant Accountant From: Production Manager Date: 1 September 2004 Subject: Accounting Terms I have, as you know, been attempting recently to gain a better understanding of the financial side of our business, particularly in the management accounting area. I should therefore be grateful if you would explain to me (in simple language) the following matters:

1. Budgets, forecasts and plans: I am unsure as to the differences (if any) between these terms. Would you please explain these differences and the significance these differences would have for me.

2. Budgets and standards: Is a budget the same as a standard? I have always worked on the assumption that it was.

3. Cash budgets: What is the point of producing cash budgets when we already spend an enormous amount of time on producing profit-based budgets? Producing cash budgets seems superfluous when we are in a profit-making position. Surely cash budgets are only relevant when a bank overdraft situation is likely?
4. Production budgets: I see that you have once again instructed managers to prepare their budgets. Is the production of budgets not your department’s responsibility?
Line managers have enough of a problem managing without the further burden of having to produce budgets.
Perhaps you could let me have your comments.
Respond to the production manager’s points. Your answer should be in the form of a memorandum.