Master Budget & Its
Components
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Budgets
Forecasts of future events
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Created by Oimi Tam
Master Budget
Different budgets are prepared to serve different purposes.
A Maser budget covers all the activities of the
organization and consists of the component budges that
cover each function
A detailed plan expressed in quantitative terms that
specifies how resources will be acquired and used during a
specified period of time
Budget period – Generally covers on financial year, but it
could be split into periods of quarter, a month or a week.
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Types of budgets with respect to time period
LONG RANGE BUDGETS (i.e. capital budgets dealing
With the acquisition of building and equipment normally
Cover several years)
CONTINUOUS (ROLLING) BUDGETS
This budget is usually a 12-month budget that rolls
Forward one month as the current month is completed
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Master Budget
Two major types of budgets comprise the master budget:
Operating budgets
Summarize the level of day to day activities such as sales,
purchasing, and production
Financial budgets
Identify the expected financial consequences of the
activities summarized in the operating budgets, which are
concerned with where to get cash and how to use cash for
the benefit of the organisation
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The Master Budget
Master Budget
Operating
Decisions
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Financial
Decisions
Operating Budgets
The sales budget - Identifies the planned level of sales for each
product
The capital spending budget - Specifies the long-term capital
investments, such as buildings and equipment, that must be
paid in the current budget period to meet activity objectives
The production budget - Funds for all required production.
The materials purchasing budget - Funds for all required
purchasing activities.
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Financial Budgets
Financial budgets evaluate the financial
consequences of investment, production, and
sales plans
1. Projected Balance sheet
2. Projected income statement
3. Projected statement of cash flows
The budgeting process is influenced strongly by
the demand forecast
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Using budgets for control
Identify Objectives
Consider Options
Make a Selection
Implement
Prepare Budget
Revised Budget
Control
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Performance
Actuals
Actual Vs Budget
Compare
Components of a master budget
OPERATING BUDGET
•Sales (revenue) budget
•Purchases budget
•Cost of goods sold
budget
•Production cost budget
(material purchase, labor
expenses, overheads
budgets)
•Operating expense budget
CAPITAL
EXPENDITURE
BUDGET
FINANCIAL BUDGET
•Cash budget
•Budgeted balance sheet
•Budgeted profit and loss
statement
Budget considerations
Considerations
Income
Fixed costs
Variable costs
Timing of cash flow is vital
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TA2 Sess 5 cash budgets
6/23/2011
Variable costs
A cost of labor, material or overhead that changes
according to the change in the volume of production
units.
Combined with fixed costs, variable costs make up the
total cost. While the total variable cost changes with
increased production, the total fixed costs stays the
same.
Investorwords.com
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TA2 Sess 5 cash budgets
6/23/2011
Fixed costs
“A cost that does not vary depending on production or
sales levels, such as rent, property tax, insurance, or
interest expense.”
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Investorwords.com
TA2 Sess 5 cash budgets
6/23/2011
Preparing an operating budget
Cash Budget
Sales Budget
Purchases Budget
COGS Budget
Inventory Budget
Operating Expense Budget
Incorporate the above three in a
Budgeted profit and loss
statement
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Preparing a operation budget
The sales budget is based on the estimates
The operating expenses are similar to expenses in a standard profit
and loss statement
COGS and purchases are a little different:
COGS are usually calculated as a percentage of sales
COGS= Beginning inventory + purchases – Ending
inventory
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Steps in completing the budget
process
1.
2.
3.
4.
5.
6.
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Objectives and targets to be achieved
Sales budget expressed in units and dollars
Production budget for a manufacturing organisation
Purchases budget for a manufacturing or retail organisation
Staffing budget expressed in numbers for particular activities
and dollar amount
Administration budget, including the cost of premises,
accounting costs cleaning and so on
Created by Oimi Tam
Sales budget
Sales budget: The sales budget is an estimate of future
sales, often broken down into both units and dollars. It is
used to create company sales goals.
The sales budget may be known as revenue budget
The sales budgets should be the first budget that every
organisation constructs
Many organisations carry out market research on their
existing customers and potential new customers to check
the level of customer satisfaction with its products or
services.
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SALES BUDGET
Budgeted sales for the next five months are:
April 20,000 units
May 50,000 units
June 30,000 units
July 25,000 units
August 15,000 units
The selling price is $ 10 per unit.
REQUIRED: Prepare a sales budget for the quarter
ending June 30.
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Sales Budget
April
May
June
Quarter
Budgeted
sales (units)
20,000
50,000
30,000
100,000
Selling price
per unit ($)
10
10
10
10
Total Revenue
($)
200,000
500,000
300,000
1,000,000
PRODUCTION (OPERATIONS) BUDGET
Sales budget
(completed)
Production
(Operations
Budget)
Production must be adequate to meet budgeted sales and
Provide for sufficient ending inventory
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PRODUCTION BUDGET
Product oriented companies create a production budget which
estimates the number of units that must be manufactured to
meet the sales goals. The production budget also estimates the
various costs involved with manufacturing those units,
including labour and material
The production cost budget could be subdivided into
A materials purchases budget,
2. A labour expenses budget and an
3. Overheads budget
1.
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PRODUCTION BUDGET
•The management wants ending inventory to be equal to 20% of the following month’s
budgeted
sales in units.
•On March 31, 4,000 units were on hand.
April
May
June
Quarter
Sales in units
20,000
50,000
30,000
100,000
Add
desired ending
inventory
10,000
6,000
5,000
5,000
30,000
56,000
35,000
105,000
Less
beginning
inventory
4,000
10,000
6,000
4,000
Units to be
produced
26,000
46,000
29,000
101,000
SELLING AND ADMINISTRATIVE EXPENSES
BUDGET
Variable selling and administrative expenses are $0.50 per unit
sold
Fixed selling and administrative expenses are $70,000 per
month
The $70,000 fixed expenses include $10,000 in depreciation
expense that does not require a cash outflow for the month
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Created by Oimi Tam
SELLING AND ADMINISTRATIVE EXPENSES BUDGET
April
May
June
Quarter
20,000
50,000
30,000
100,000
0.50
0.50
0.50
0.50
Variable expense
10,000
25,000
15,000
50,000
Fixed S & A expense
70,000
70,000
70,000
210,000
Total expense
80,000
95,000
85,000
260,000
Less (non-cash
expenses)
(10,000)
(10,000)
(10,000)
(30,000)
70,000
85,000
75,000
230,000
Sales in units
Variable S & A rate
($)
Cash Disbursements
Operating Expenses Budget
These are expenses that contribute to the sale of the product or
service, and include advertising, sales promotions and travel.
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Financial statement budgets
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Financial statement budgets
Budget income statement – an income statement
represents a summary of an organisation’s revenue and
expenses. It shows gross profit, expenses and net profit
Budget balance sheet – shows the financial state of affairs
of an organisation at a particular point in time, it shows
the assets, liabilities and the owner’s equity at that point.
Cash flow projections – referred as cash budgets, tell you
whether you have enough cash to pay your bills, cash
budgets help with borrowing plans when cash is expected
to be short.
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Created by Oimi Tam