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The master budget divides operational and financial budgets. Operational budgets include a summary of sales, production, cost of goods sold, operational expenses, selling expenses, and administration expenses. Financial budgets include the income statement, cash statement, and balance sheet.
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The operational budgets within the master budget includes summary figures of the company's operations.
Sales Budget: The summary sales budget includes the number of units sold per product, average cost per unit, and the total sales for the period.
Production Budget: The production budget lists opening stock, total number of sales for the period, and the required opening stock for the next accounting year, to derive the number of units produced.
Cost of Goods Sold: The cost of goods sold budget lists the per unit cost of direct materials, direct labor, and manufacturing overheads, to determine the total costs incurred to produce the number of units sold, distinct from the total cost of units actually produced.
Operational Expense Budget: The operational expense budget summarizes the cost of direct materials, direct labor, and manufacturing overheads involved in producing the net number of units, derived from the production budget.
Selling Expense Budget: The selling expense budget lists the net value of items such as commission, rent, advertising, transportation, and other expenditures incurred to make sales. Such expenses are either fixed, remaining the same regardless of the number of units sold, or variable, changing with the number of units sold.
Administrative Expense Budget: The administrative expense budget lists out the indirect costs associated with selling the product, such as salaries of staff, insurance, communication charges, cost of office supplies, bad debts, and other items.
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The financial budgets within the master budget provides a summary of the company's financial position using values derived from the operational budgets.
Income Statement: The income statement derives values from the various operational budgets, to reveal gross income. The statement incorporates additional outflows such as tax and interest expenses to derive the net income for the period.
Cash Budget: The cash budget is a summary of the cash flow statement, listing out the opening cash, net inflows, and net outflows, deriving the cash on hand at the end of the period. Unlike the income statement, this budget uses the actual operational expenses instead of the cost of goods sold to determine input costs. If the units produced are more than the units sold, the cash budget would show a lesser value than net profit in the income statement, and vice versa.
Balance Sheet: The balance sheet is the final item in the master budget, and summarizes the company’s financial assets, liabilities and financial position at the end of the budget period.
The example of a master budget provided herein contains summary information from all other budgets and is useful for investors and analysts to gain a sound and comprehensive understanding of the company’s financial and operational position easily.
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Accounting30. "Master Budget." http://www.saskschools.ca/curr_content/acct30rev/mod3/mod3masterbudget.html. retrieved May 06, 2011.
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