Question

ANSWER ALL QUESTIONS...

(1) "Define Master Budget".

(2) "Discuss the following four (4) Budgets including identifying the order in which these Budgets are prepared:

(1)    SALES BUDGET

(2)    PRODUCTION BUDGET

(3)    DIRECT MATERIALS PURCHASES BUDGET

(4)    CASH BUDGET".

Answer 1

1. "Master Budget" is the aggregation of all the functional budgets.

This is not a separate budget as such, but grouping all the lower level budgets and includes the budgeted financial statements, i.e., 'Income Statement', 'Statement of Retained Earnings' and 'Balance Sheet'.

2.

(a) Sales Budget:

Sales Budget involves estimating the sales activity which includes, the units of goods to be sold, price at which the goods are sold and also the nature of the sale (cash or credit).

This is the first step in budget preparation , as unless the expected sales are known the production programme cannot be fromulated.

(b) Production Budget:

This is the second step in budget preparation process. Once the expected sales are known, the company can plan for production activity, wherein it can decide how much to produce to achieve the budgeted sales.

(c) Direct Materials Purchase Budget

Once the production is budgeted, next comes the budgeting of inputs to achieve the production. This involves budgeting for requirement of direct material ,direct labor and manufacutring overhead. Among these the budgeting for direct material is the first , as this involves procuring the material from outside the business. Therefore the Direct material budget follows the 'Production Budget'.

(d) Once all the details related to revenue (sales) and expenses (material,labor and overhead including S&A expenses) are budgeted the most important is the 'Cash Budgeting' wherein the funds required for the activities mentioned above are to be planned and arranged. sometimes the company may need to go for outside financing, which can be planned once the cash budget is prepared.