Master Budget

• A budget is the quantitative expression of a

proposed plan of action by management for a
specified period.
• A budget is an aid to coordinating what needs to
be done to implement that plan.

A budget generally includes both the plan’s

financial and nonfinancial aspects and serves as a
blueprint for the company to follow in an
upcoming period.

BUDGET DEFINED
• BUDGET REPORT – compare actual performance with
budgeted performance
• CONTINUOUS (ROLLING) BUDGET – one that is
revised on a regular basis; typically, the budget is
extended for another month or quarter in accordance with
new data as the current month or quarter ends
• FIXED (STATIC BUDGET) – based on only one level
of activity or production
• FLEXIBLE (VARIABLE/DYNAMIC) BUDGET – a
series of budgets prepared for many levels of activity
ADVANTAGES OF BUDGETS

• Promotes coordination and communication

among subunits within the company.
• Provides a framework for judging
performance and facilitating learning.
• Motivates managers and other employees.
TIME COVERAGE OF BUDGETS

• The timeline for a budget is dependent on

the motive for creating the budget.
• The most frequently used budget period is
1 year.
Master Budget
• Represents the overall plan of the
organization for a given budget period.

• Consists of all the individual budgets for

each of the segment of the organization
aggregated or consolidated into one overall
budget for the entire firm
Master Budget
• The master budget is at the core of the
budgeting process. It expresses
management’s operating and financial
plans for a specified period:

Operating decisions deal with how to best use the limited

resources of an organization. (the operating budget)
Financial decisions deal with how to obtain the funds to
acquire those resources. (the financial budget)
BASIC OPERATING BUDGET STEPS
1. Prepare the revenues/sales budget
2. Prepare the production budget
3. Prepare the direct materials usage budget and direct
materials purchases budget
4. Prepare the direct manufacturing labor budget
5. Prepare the manufacturing overhead costs budget
6. Prepare the ending inventories budget
7. Prepare the cost of goods sold budget
8. Prepare the operating expense (period cost) budget
9. Prepare the budgeted income statement
BASIC FINANCIAL BUDGET STEPS
Based on the operating budgets:

1. Prepare the capital expenditures budget.

2. Prepare the cash budget.
3. Prepare the budgeted balance sheet.
4. Prepare the budgeted statement of cash
flows.
• Another document sometimes included in the
master budget is a set of key performance metrics
that are calculated based on the information in
the budget.
• For example, it may show accounts receivable
turnover, or inventory turnover, or earnings per
share.
• These metrics are useful for testing the validity of
the budget model against actual results in the
past.
EXERCISES IN
BUDGETING
Carson, Inc. produces office supplies, including pencils.
Pencils are bundled in packages; each package sells for P20.
The sales budget for the first four months of the year
follows for this product.
January 100,000 units
February 120,000
March 110,000
April 100,000
Company policy requires that ending inventories for each
month be 10 percent of next month’s sales. However, due to
greater sales in December than anticipated, the ending
inventory of pencils for that month is only 5,000 packages.

Production Budget
 JANUARY FEBRUARY MARCH TOTAL

SALES 100,000 120,000 110,000 330,000

Add: DESIRED EI 12,000 11,000 10,000 33,000
TOTAL NEEDS 112,000 131,000 120,000 363,000
Less: Beg. Inv. 5,000 12,000 11,000 28,000
UNITS 107,000 119,000 109,000 335,000

Production Budget
The production budget of a corporation for the upcoming
fiscal year is as follows:

Budgeted production in units

Q1 2,000 Q2 2,050 Q3 2,125 Q4 1,950

Each unit requires 4 hours of DL. The company’s variable

manufacturing OH rate is P5 per DL and the company’s
fixed manufacturing OH rate P50,000 per quarter. The only
non-cash item included in fixed manufacturing overhead is
depreciation, which is 20,000 per quarter.

MOH Budget
Q1 P50,000 + (2000u x 4hrs/u x P5/hr) = P90,000
Q2 P50,000 + (2050u x 4hrs/u x P5/hr) = P91,000
Q3 P50,000 + (2125u x 4hrs/u x P5/hr) = P92,500
Q4 P50,000 + (1950u x 4hrs/u x P5/hr) = P89,000
Whole Year P362,500

MOH Budget
Lawrence Inc., found that about 20% of its sales during the
month were for cash. Lawrence has the following AR
payment experience:
In the month of sale 40%
In the month after sale 50%
In the 2nd month after sale 8%
Lawrence’s anticipated sales for the next few months are:
April P240,000
May P288,000
June P276,000
July P295,000
August P300,000

Cash Budget
Cash Sales (295,000 * 20%) 59,000
Collections:
From May credit sales (288,000 * 80% * 8%) 18,432
From June credit sales (276,000 * 80% * 50%) 110,400
From July credit sales (295,000 * 80% * 40%) 94,400

Cash receipts P282,232

Cash Receipts Budget for July

End…