The master budget is a comprehensive financial planning tool used by organizations to
coordinate and manage all aspects of their operations. It consists of both operating budgets
and financial budgets, each serving a specific purpose. Here’s a breakdown of the
components you mentioned:
1. Production Budget
● Purpose: Specifies the number of units that must be produced to meet sales goals and
maintain adequate inventory levels.
● Calculation: Based on expected sales and inventory levels.
○ Formula: Required production = Expected sales + Desired ending
inventory - Beginning inventory.
2. Sales Budget
● Purpose: Estimates the sales revenue for a specific period based on sales forecasts,
often broken down by product, region, or salesperson.
● Details: Includes expected unit sales, selling prices, and total sales revenue.
3. Operating Budgets
● These include budgets related to the day-to-day operations of the company and help in
determining the operational costs.
● 1. Direct Labor Budget
○ Purpose: Estimates the labor costs required to produce the planned number of
units. It factors in labor hours and wage rates.
○ Details: Includes the number of labor hours needed per unit and the hourly wage
rate.
● 2. Direct Materials Budget
○ Purpose: Calculates the cost of raw materials needed for production.
○ Details: Takes into account the materials required per unit, expected production
volumes, and the cost of materials.
● 3. Manufacturing Overhead Budget
○ Purpose: Predicts the overhead costs associated with manufacturing, including
both variable and fixed costs (such as utilities, depreciation, and factory salaries).
○ Details: Can include items like factory rent, indirect labor, and utilities.
● 4. Selling and Administrative Expense Budget
○ Purpose: Forecasts the costs related to selling products and managing the
business, like marketing expenses, salaries, and administrative overhead.
○ Details: Can include both variable and fixed expenses, such as sales
commissions, office rent, and administrative salaries.
4. Budgeted Income Statement
● Purpose: A projected profit and loss statement based on the sales and operating
budgets.
● Details: Includes sales, cost of goods sold (COGS), gross profit, operating expenses,
and net income.
5. Financial Budgets
● These budgets focus on the financial position of the company and are related to its
overall financial planning and strategy.
● 1. Capital Expenditure Budget
○ Purpose: Details the company’s planned investment in long-term assets (like
machinery, equipment, and buildings).
○ Details: Includes the cost of acquiring, upgrading, or maintaining fixed assets.
● 2. Cash Budget
○ Purpose: Projects the company’s cash inflows and outflows over a specific
period to ensure that there is sufficient cash to meet operational needs.
○ Details: Takes into account cash receipts, payments, and financing needs.
● 3. Budgeted Balance Sheet
○ Purpose: A forecast of the company’s financial position at the end of the budget
period, based on the other budgets.
○ Details: Includes assets, liabilities, and equity based on the projections from the
sales, operating, and financial budgets.
Summary Flow of Master Budget:
1. Sales Budget → Production Budget → Operating Budgets (Direct Labor, Direct
Materials, Manufacturing Overhead, Selling/Admin Expenses) → Budgeted Income
Statement.
2. Financial Budgets (Capital Expenditure, Cash, Budgeted Balance Sheet).
The master budget integrates all these individual budgets to provide a comprehensive view of
the company’s planned operations, financial position, and performance. It is a vital tool for
decision-making and financial control.
