Question

175 word minimum and plagerism free.

What are the components of a master budget? Is one budget more important than another in a master budget? What budget do you start with in a master budget? Laurie: It might help to give an example of a company and describe their budget...Note that you could talk about the budgeting process in your own company.

Answer 1

Master budget has two major sections which are the operational budget and the financial budget. They have following components:

Operational Budget

1. Sales Budget
2. Production Budget
3. Direct Material Purchases Budget
4. Direct Labor Budget
5. Overhead Budget
6. Selling and Administrative Expenses Budget
7. Cost of Goods Manufactured Budget

Financial Budget

1. Schedule of Expected Cash Receipts from Customers
2. Schedule of Expected Cash Payments to Suppliers
3. Cash Budget
4. Budgeted Income Statement
5. Budgeted Balance Sheet

Note that all of the above component budgets may not be included in the master budget of every business. Some of these such as production budget and cost of goods manufactured budget are not need by a non-manufacturing business.

Order of components of master budget

As we said earlier, the components of master budget are interconnected, which means that numbers from one component budget flow to another one. For example sales budget numbers are used in schedule of cash receipts from customers and unless the sales budget is prepared we are unable to prepare schedule of receipts from customers because of lack of information. This means that components of master budget must be prepared in a specific order. We have ordered the above list in such a way that the necessary information needed by any component budget is provided by a preceding component.

Preparation of the master budget starts with a sales budget. The sales budget guides the rest of the budgeting process because the level of production, and therefore the cash needed for production, is directly dependent on the level of sales forecast. To begin the sales budget, company management usually uses current and prior year sales as a starting point to make an educated guess on the subsequent year's sales figures.