Process of Preparing Master Budget
Some of the budget listed above cannot be prepared until other budgets on the list are the first prepared and complete. In order to complete a master budget, company management completes the sub-budgets that make up the master budget. For example, the production budget in a manufacturing company and the merchandise purchase budget in the trading business cannot be prepared until the sales budget is available. By understanding the budgets that make up the master budget, you can bring the budgeting process to your company. The Preparing master budget is a very significant planning tool which is reviewed by the directors to see if it represents an acceptable plan for the organization for the forthcoming period.
As a result budget within the master budget must be prepared in a definite sequence as follows:
(1) Preparation Of Functional Budget:
- Sales Budget
- Production Budget
- Direct Material Budget: Direct Material Uses Budget, Direct Material Purchase Budget
- Direct Labor Budget
- Factory Overhead Budget
- Cost Of Production Budget
- Cost Of Goods Sold Budget
- Selling And Administrative Budget.
The master budget counts on your understanding of cost behavior, the results of capital budgeting, pricing, and other managerial accounting information in order to plan a concrete strategy to meet sales, profit, and cash-flow goals for the coming year. It usually comprises the budgeted Income statement, budgeted balance sheet, and cash budget.
(2) Preparation Of Financial Budgets:
- Budgeted Income Statement
- Cash collection and distribution budget
- Budgeted Balance Sheet.
Prepare the master budget, as a summary of all other budgets, and submit it to the board of directors for approval as a plan for the following budget period. It helps to coordinate the activities of the sales, purchasing, production, and provides top management with a tool to monitor the company’s progress and take corrective action.
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