Question

1. Building the Master Budget involve:
   1. The Sales Budget.
   2. The Production Budget
   3. Expected Cash Collections Budget
   4. The Direct Materials Budget
   5. Expected Cash Disbursement Budget
   6. The Direct Labor Budget
   7. Manufacturing Overhead Budget
   8. Ending Finished Goods Inventory Budget
   9. Selling and Administrative Expense Budget
   10. The Cash Budget
   11. The Budgeted Income Statement
   12. The Budgeted Balance Sheet

Full Explanations

Answer 1

Master Budget

The master budget is a one-year budget planning document for the firm encompassing all other budgets. It coincides with the fiscal year of the firm and can be divided  into quarters and further into months. If the firm plans for the master budget are to be an ongoing document, rolling from year to year, then normally a month is added to the end of the budget to facilitate planning. It is called continuous budgeting.

The budget committee usually develops the master budget for each year, which is handled by  Budget Director, who is usually the Controller of the company.

Major Parts

Depend  on the size of the firm, the master budget is a comprehensive budget planning document. It usually has two parts; the operating budget and the financial budget. The operating budget reflects  the income-generating activities of the firm, including revenues and expenses. The result is a budgeted income statement.

The financial budget reflects  the inflows and outflows of cash and other elements of the firm's financial position. The inflows and outflows of cash come from the cash budget. As such, the result of the financial budget is the budgeted balance sheet. Operating budgets are made first as information from the operating budgets is needed for the financial budgets.

Operating Budget

The operating budget is composed of eight supporting budget planning schedules. They are interrelated and come together to develop a budgeted income statement based on the operating budget.

The budgeted income statement is the result of the eight schedules. Take note that operating income is not the same as net income. In order to get net income, you have to subtract out Financial Budget.

Sales Budget

The first schedule to develop is the sales budget, which is based on the sales forecast. The sales budget is not usually the same as the sales forecast but it is somewhere  adjusted based on managerial judgment and other data.

Production Schedule

The second schedule for budget planning is the production schedule. The company should:

• Determine the number of sales the company expects to make in the future ie next year or next quarter
• It reflects  how many sales in units it needs to make to meet the sales budget and meet-ending inventory requirements.

Most companies have an ending inventory they want to meet every month or quarter so that they don't stock out.

Direct Materials, Labor, and Overhead Budget

The next schedules are the direct materials purchases budget which refers to the raw materials the firm uses in its production process, the direct labor budget, and the overhead budget. The overhead budget includes both fixed and variable overhead costs.

Finished Goods Inventory and Cost of Goods Sold Budget

The ending finished goods inventory budget is necessary to complete the cost of goods sold budget and the balance sheet. This budget directly  assigns a value to every unit of product produced based on raw materials, direct labor, and overhead.

Administrative Budget

The selling and administrative expense budget deal with cost associated with sales ie non manufacuturing costs  such as freight or supplies.

Cash Budget, Budgeted Balance Sheet, and Capital Expenditures

three remaining budgets found in the financial budget portion of the master budget. They are  cash budget, the budgeted balance sheet, and the budget for capital expenditures. The cash budget shows cash inflows and outflows, expected borrowing, and expected to invest, usually on a monthly basis. Any item that is not in cash, such as depreciation, is ignored by the cash budget.

The budgeted balance sheet shows the ending balances of the asset, liability, and equity accounts if budgeting plans hold true during the budgeting time period.

The budget for capital expenditures contains budgetary figures for the large, expensive fixed assets for the business firm.

These are the most often used budgets within the master budget of business firms. Some firms may not use one or another of the budgets, but most use some form of all of them. Service firms, for example, do not typically use production budgets.

Schedule of Expected Cash Collections. Schedule of expected cash collections from customers shows the budgeted cash collections on sales during a period. It is a component of master budget and it is prepared after the preparation of sales budget and before the preparation of cash budget