Master Budget

                                                  Master Budget

Introduction

Before We go ahead with the Master Budget , Let us explain what is Budget ? It is a financial plan or estimation for a future period of time in terms of money .

In fact, Master Budget  is the combination of all other  budgets prepared within a specific period.

Firstly, This is a detail analysis of the first year for the Long-range plan.

Secondly, The Budget  gives the brief statement  of  the scheduled or planned activities of all sub-division in an Organization.

Friends, If you want to know more about Budgeting, you can read my previous blogs on Budgeting

Master Budget is divided into two parts

·         OPERATING BUDGET

·         FINANCIAL BUDGET

OPERATING BUDGET

This Budgets  analyzes the fund which helps in successful running of the business. Thus, It is also called  a Revenue and Expense Budget .

Furthermore, The Budget  represents the company’s expenses, expected costs and estimated income to use for its operation.

Therefore , Operating Budget  helps in setting up financial responsibility,  reduces business debt ,  managing current expenses and  projecting future expenses.

 A)

Sales Budget

It is also called Revenue Budget and is the first and basic component of Master Budget.

Next, Sales Budget consists of detail estimate of  expected volume of sales and selling expenditure.

Furthermore, We make Budget according to the nature and expansion of business . Thus , It is either  Product Wise, Territory Wise, Period Wise, Event Wise, Customer Wise or Salesmen Wise.

 Mathematically, 

a) Sales Budget (Sales)

Budgeted Sales = (Budgeted Unit Sales) * (Budgeted Sales Prices)

b) Sales Budget (Cash Collections)

Current Period Cash Collections = Current Period Cash Sales + Current Period Credit Sales Collected + Prior Period Credit Sales Collected

B)

Production Budget

The  Budget is prepare for prediction/estimation of the Production in the budget period. Additionally, It is based on Sales Budget and thus  based on Product Wise, Period Wise and Plant Wise.

Numerically,

 Production Budget = Budgeted Unit Sales ( from Sales Budget (Sales)) + Desired Ending Finished Goods  – (minus) Beginning Finished Goods

C)

Direct Materials Budget

This Budget estimates the quantity of the direct materials which helps  to meet production requirements.

Furthermore, It determines the cost for materials to build the products required to meet the sales.

Thus, Direct Material Budget determines the number of products needed from the production budget. Meanwhile, you can prepare this Budget either Monthly, Quarterly or Annually.

 Mathematically,

a)  Quantity of Material needed for Production=  (Units to be Produced) * (Quantity of Material Budgeted Per Unit)

b) Quantity of Material to be Purchased= (Quantity  of Material Needed for Production) + (Desired Ending Material Inventory) – (minus)  Beginning Material Inventory

c)  Budgeted Cost of Material Purchases= (Quantity of Material to be Purchased) * (Budgeted Material Prices)

d) Cost of Material Used= (Quantity Needed for Production) * (Budgeted Material Prices)

e) Cash Payments for Direct Material Purchase= Current Period Purchases  Paid in Current Period + Prior Period Purchases Paid in Current Period

 

 D)

Direct Labor Budget

As the name suggest, This Budget estimates the cost of direct labor (they are employees who work in the factory) involved in the production .

Thus, Direct Labor Budget helps in estimating the number of employees required for production (company’s target) .

Finally, It represents either in monthly or quarterly.

 Thus Numerically,

a) Direct Labor  Hours  Needed for Production = ( Units to be produced) * (Direct Labor Hours Budgeted Per Unit)

 b)Budgeted Direct Labor Cost = (Direct Labor hours needed for Production) * (Budgeted Rates per hour)

 

E)

Factory Overhead Budget

This is also called Manufacturing Overhead Budget.  Additionally, It   estimates the cost of running your manufacturing facility.

For example.:- Factory Rents, Lightning, Heating, Factory Power, Fuel, Insurance etc.

However, Factory Overhead Budget does not include material cost or employee cost.

 Therefore Numerically,

a) Budgeted Factory Overhead Costs =(Budgeted Fixed Overhead) + (Budgeted Variable Overhead Rate) * (Direct Labor Hours Needed for Production)

b) Cash Payments for Overhead = (Budgeted Factory Overhead Cost) – (minus)  (Depreciation and Other Costs that do not require cash payments

 

F)

Ending Inventory Budget

Furthermore,  

a)Ending Direct Materials = ( Desired Ending Materials from Quantity of material to be Purchased) * (Budgeted Prices)

 b)Quantity of Material to be Purchased = (Quantity  of Material Needed for Production) + (Desired Ending Material Inventory) – (minus)  (Beginning Material Inventory)

 c)Budgeted or Standard Unit Cost  = (Quantity of Direct Material required per Unit ) * (Budgeted Prices) + (Direct Labor Hours required Per Unit) * (Budgeted Rate) + (Total Overhead Rate) * (Direct Labor Hours Required Per Unit)

 d)Ending Finished Goods = (Desired Ending Finished Goods from  Production Budget) * (Budgeted Unit Cost)

e)Production Budget = Budgeted Unit Sales (Sales) + Desired Ending Finished Goods  – (minus) Beginning Finished Goods

G)

Cost of Goods Sold Budget

 This is also said COGS or  called Cost of Sales. Thus, It is the cost of the Goods/Product that a retailer, distributor or  Manufacturer has  sold.

For example.:- IF a Manufacturer  sold its Goods/Product to a wholesaler then the cost of the inventory for the manufacturer becomes the Cost of Goods Sold , However, Distributor or Wholesaler who bought this Goods/Product then the cost of the Goods/Product becomes the current asset  for a Whole Seller.

Furthermore, This is an Expense Account  in the Income Statement.

To Illustrate Numerically,

a)Budgeted Total Manufacturing Cost = (Cost of Direct Materials) + (Cost of Direct Labor used  ) + Total Factory Overhead Costs )

b)Budgeted Cost of Goods Sold = (Budgeted Total Manufacturing Cost) + (Beginning Finished Goods (Calculate from Production Budget and or Budgeted or Standard Unit Cost   from  Ending Inventory Budget)) – (minus) (Ending Finished Goods)

 

 H)

 Selling & Administrative Expense Budget

This   estimates budget  of  all non-manufacturing department  like sales, Marketing, Human Resources, Finance, Accounting, Engineering departments.

Therefore,

a) Budgeted Selling & Admin Expenses =   Budgeted Fixed Selling & Admin Expenses + (Budget Variable rate as a Proportion of Sales) * (Budgeted Sales)

b) Cash Payments for Selling & Administrative Expenses=  Budgeted Selling & Admin Expenses – (minus)  (Depreciation and other cost which do not require cash Payments)

 I)

Budgeted Income Statement

 The Budgeted Income Statement  is also called Pro Forma Income Statement.

Finally, It helps in forecasting and evaluating performance in the future and thus, determines whether the expected profit target is fulfill for the budget period.

Further,  Mathematically

(Budgeted Sales – (minus) Budgeted Costs of Goods Sold ) =  Budgeted Gross Profit

(Budgeted Gross Profit – (minus)  Budgeted Selling & Administrative  Expenses) = Operating Income

(Operating Income –(minus) Interest Expense –(minus) Bad Debts Expense)  = Net Income Before Taxes

(Net Income Before Taxes – (minus) Income Taxes) = Net Income After Taxes

Budget Income Statement Structure

Budgeted Income Statement Structure

 

J)

Cash Budget

It  gives an estimate of anticipated receipts and payments of cash during Budget Period.

Next, We take Cash Receipt from:

·         Business Operation (Trading Receipt):

For Example: Cash Sales,  Collections from Debtors, B/R, Advance from Customers.

·         Non-Business Operations :

For Example:- Dividend Receipt, Interest, Rent, Refund of Tax

·         Capital Transactions:

For Example: Sales of Fixed Assets, Sales of Investments, Issue of Shares, Issues of Debentures.

Similarly, We take Cash Payment or Disbursements from :

·         Business Operations:

For Example:- Cash Purchase, Payment to Creditors, Payment of Salary, Wages, Overheads.

·         Non-Operating Expenses:

For Example:- Interest, Dividend, Income-Tax, Donation

·         Capital Transactions:

For Example: Redemptions of Shares, Redemptions of Debentures,  Purchase of Fixed Assets,  Purchase of Investment

Methods of Preparation of Cash Budget

• Receipts and Payment Method  OR Cash Accounting Method
• Budgeted OR Projected Balance Sheet Method
• Cash Flow Method OR Project Forecast Method.

K)

Capital Budget

The Capital Budget is an estimate to evaluate whether we must take or finance investment projects to create wealth.

Additionally, It means that the investor should invest its current funds most efficiently in long term activities  to get benefit in future.

Furthermore, Investment decision should include Expansion, Acquisition, Modernization, Replacement of the Long-term assets, Research and Development Program.

Finally, Decisions requires huge investment, and the exchange of current funds are for future benefits.

L)

Balance Sheet

Balance Sheet is a financial Statement in which every company prepares it at the end of financial year and the company shows it in the Annual Report.

Thus, It provides information of mainly 3 things like Assets , Liabilities and Shareholders equity or Owners Equity or Equity or Net Worth or Book Value

Why is It called Balance Sheet ?

Balance Sheet is divided into two parts

• Assets
• Equities + Liabilities

 

The Assets and Equities + Liabilities of a Company is in Balance, Thus, It is called Balance Sheet.

Therefore                       Assets = Equities + Liabilities