The master budget is a comprehensive financial plan that integrates various individual budgets and represents the overall financial plan for an organization. It consists of several budgets, each serving a specific purpose and providing detailed information for different aspects of the organization’s operations. The budgets typically used to create the master budget include:
- Sales Budget: The sales budget forecasts the expected sales revenue for a specific period. It is the starting point for the master budget and provides the basis for other budgets.
- Production Budget: The production budget outlines the quantity of goods or services that need to be produced to meet the sales forecast. It considers factors such as desired ending inventory levels, beginning inventory levels, and the sales forecast.
- Direct Materials Budget: The direct materials budget estimates the quantity and cost of materials needed for production based on the production budget. It considers the materials required for each unit of production and accounts for desired ending and beginning inventory levels.
- Direct Labor Budget: The direct labor budget estimates the quantity and cost of labor required for production. It considers the production budget, labor requirements per unit, and labor rates.
- Manufacturing Overhead Budget: The manufacturing overhead budget estimates the costs associated with manufacturing operations that are not directly tied to specific units of production. It includes costs such as factory rent, utilities, maintenance, and indirect labor.
- Selling and Administrative Expense Budget: The selling and administrative expense budget estimates the costs associated with selling, marketing, and administrative activities. It includes expenses such as salaries, advertising, office supplies, and utilities.
- Cash Budget: The cash budget forecasts the inflows and outflows of cash during a specific period. It considers cash receipts from sales, cash payments for various expenses, investments, and financing activities. The cash budget helps in planning and managing the organization’s cash flow.
- Capital Expenditure Budget: The capital expenditure budget outlines the planned investments in long-term assets such as property, plant, and equipment. It considers the organization’s strategic objectives, maintenance needs, and expansion plans.
- Budgeted Income Statement: The budgeted income statement summarizes the expected revenues, costs, and expenses for a specific period based on the sales forecast and other budgeted amounts. It provides an overview of the organization’s projected financial performance.
- Budgeted Balance Sheet: The budgeted balance sheet reflects the projected financial position of the organization at the end of a specific period based on the budgeted income statement, capital expenditure budget, and other budgeted amounts. It includes assets, liabilities, and equity.
These budgets are interrelated and form the foundation for the master budget. They provide detailed information about the organization’s operations, financial requirements, and projected performance, enabling effective planning, resource allocation, and performance evaluation.