Question

Explain the components and order for creating a Master Budget.

Answer 1

The Master Budget is also called as the Annual Profit Plan or as Comprehensive Budget. The master budget is a summarized set of budgeted financial statements including the Budgeted Balance Sheet, Budgeted Income Statement and Budgeted Statement of Cash Flows. It is a consolidation of all the departmental budgets.

The Master Budget is made up of Operating Budgets & Financial Budgets.
The operating budgets for individual units/ departments are compiled into the Budgeted Income Statement. The Operating Budget includes :
1. Sales budget
2. Production budget
3. Direct materials usage budget
4. Direct materials purchase budget
5. Direct labour budget
6. Manufacturing overhead costs budget0
7. Ending inventories budget (Finished goods & direct material)
8. Cost of goods sold budget
9. Non-manufacturing budget
The Financial Budget includes :
1. Cash budget
2. Capital expenditure budget
3. Budgeted Statement of Cash Flows
4. Budgeted Balance Sheet

The Capital Expenditure Budget is not a part of the annual budget development process. It is prepared for several years at a time. But it must be in place for the period covering the budget year before the planning is completed since it contains items that will need to be included in the income statement and the Balance Sheet for the budget year.

Because of the way the individual budgets are connected to each other, a change in one budget will almost always affect atleast one other budget. So the following order should be followed for creating a Master Budget -
1. Sales budget
2. Production budget
3. Direct materials usage budget
4. Direct materials purchase budget
5. Direct labour budget
6. Manufacturing overhead costs budget0
7. Ending inventories budget (Finished goods & direct material)
8. Cost of goods sold budget
9. Non-manufacturing budget
10. Cash Budget
11. Budgeted Income Statement
12. Budgeted Balance Sheet
13. Budgeted Cash Flow Statement