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Notes - Master Budget

1) A budget is a quantitative, financial plan for a period of time that is used to control a firm's activities. It is important for communicating plans, forcing planning, allocating resources, discovering issues, and coordinating/evaluating performance. 2) The master budget process begins with the sales budget which forecasts revenue based on unit price, quantity, costs, demand, and competition. 3) The production budget determines required production based on the sales budget and inventory policies. The materials, labor, and overhead budgets are then calculated based on production needs and standards. 4) The cash budget analyzes cash inflows and outflows to understand liquidity, beginning with an opening balance and calculating receipts

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173 views5 pages

Notes - Master Budget

1) A budget is a quantitative, financial plan for a period of time that is used to control a firm's activities. It is important for communicating plans, forcing planning, allocating resources, discovering issues, and coordinating/evaluating performance. 2) The master budget process begins with the sales budget which forecasts revenue based on unit price, quantity, costs, demand, and competition. 3) The production budget determines required production based on the sales budget and inventory policies. The materials, labor, and overhead budgets are then calculated based on production needs and standards. 4) The cash budget analyzes cash inflows and outflows to understand liquidity, beginning with an opening balance and calculating receipts

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Karen Cael
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lOMoARcPSD|5649527

The Master Budget

Strategic Cost Management (Mindanao State University General Santos)

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MINDANAO STATE UNIVERSITY - GENERAL SANTOS CITY


COLLEGE OF BUSINESS ADMINISTRATION AND ACCOUNTANCY
DEPARTMENT OF ACCOUNTANCY

ACT121: Strategic Cost Management


THE MASTER BUDGET

LESSON OBJECTIVES
At the end of this module, you will be able to:
a) Know what is budget and its role in the management process
b) Know the importance of strategy in budgeting and its relationship to the strategic long-
term and short-term goals of the firm
c) Know the management process of preparing the master budget
d) Prepare a sales budget including a computation of expected cash receipts
e) Prepare a production budget, direct materials budget, direct labor budget including the
computation of expected cash disbursements for purchases of materials and payment of
direct labor
f) Prepare a cash budget
g) Prepare a budgeted income statement and a budgeted statement of financial position

OVERVIEW
In the previous module, it talked about strategy. In this module, we will know the importance of
strategy in budgeting. So as strategy is defined, it is the path chosen by firms for attaining its long-
term goals and missions. Strategy will serve as the starting point in preparing plans and budgets.
For example, the Philippine government wanted to have a secure territory, a good strategy to
attain that goal is to equip its law enforcers. By that, expect that a budget will be allotted in
equipping law enforcers to attain the goal.

ABSTRACTION
Strategy and The Master Budget

What is a Budget?
Budget is a realistic plan, expressed in quantitative terms, for a certain period of time. The act of
preparing is called budgeting. The use of budget to control a firm’s activities is known as budgetary
control.

Budgeting is important because:


1. Budgets can be used by top management to communicate its plans and goals throughout
the organization;
2. Budgets force management to think about and plan for the future;
3. Through budgeting, resources are more appropriately allocated;
4. Through budgeting, potential bottlenecks can be discovered before they occur;
5. Budgeting promotes coordination of the activities of the entire organization;
6. The goals and objectives identified in the budgeting process can serve as benchmarks or
standards for evaluating performances.

THE BUDGET PROCESS


Budgets are plans expressed in quantitative form, primarily in financial expression. When plans
are expressed quantitatively, they are more objective, understandable, and measurable.

The budgetary process is dependent on the organizational structure and purposes. As such, the
budget normally starts in answering the basic question. “Is there a market for the business?.” This
question directs the master budgeting process to start in the sales budget.

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lOMoARcPSD|5649527

MINDANAO STATE UNIVERSITY - GENERAL SANTOS CITY


COLLEGE OF BUSINESS ADMINISTRATION AND ACCOUNTANCY
DEPARTMENT OF ACCOUNTANCY

The Sales Budget


Sales indicate meeting customers’ wants, demands, needs, and desires. It is the force that
induces the creation of business organization. It is the motive of business organization and the
genesis of normal business planning.

Mathematically, sales are affected by the unit sales price and quantity sold. The unit sales price
is affected by cost, competition, product substitutes, market trends, government regulations,
demand and supply behavior, and estimated profit, among other things. The number of units sold
is affected by the unit sales price. Sales forecasting deals with trends in business environment.

The sales budget will show how many products will be sold and at what price. It is the foundation
of short-term budgets. It also shows revenue predictions and will serve as the trigger point of the
whole master budget as presented in the figure above.

The Production Budget


Budgeted production is based on the budgeted sales and inventory policies. An inventory policy
is normally based on the number of units to be sold in the following period. The formula for the
budgeted production could be derived from the traditional method of determining number of units
to be sold:
Projected Sales xxx
Add: Finished Goods Inventory – end xxx
Total Goods Available for Sale xxx
Less: Finished Goods – beg (xxx)
Budgeted Production xxx

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lOMoARcPSD|5649527

MINDANAO STATE UNIVERSITY - GENERAL SANTOS CITY


COLLEGE OF BUSINESS ADMINISTRATION AND ACCOUNTANCY
DEPARTMENT OF ACCOUNTANCY

The Raw Materials Budget


The raw materials budget is based on the budgeted production. Multiply the budgeted by the
standard materials per unit of finished goods to get the budgeted direct materials to be used. Then
add the materials inventory ending and deduct the materials inventory beginning to get the
budgeted materials purchases.
Budgeted Raw Materials Used (BUDGETED PROD * STD MATERIALS PER UNIT) xxx
Add: Mat. Inventory – end xxx
Total Materials for Use xxx
Less: Mat. Inventory – beg (xxx)
Budgeted Raw Materials purchases in Units xxx
x Materials Cost per Unit x___
Budgeted Materials Purchases in Pesos xxx

The Direct Labor Budget


Let us assume a labor-intensive operation where workers are paid by hour. On this premise, the
budgeted direct labor hours are budgeted production times the standard direct labor hour per unit
produced. The standard direct labor rate per hour is to be supplied by the Human Resource
Department.
Budgeted Direct Labor Hrs. (BUDGETED PROD. * STD. DLH PER UNIT) xxx
x DL Rate per hour x__
Budgeted DL Cost xxx

The Factory Overhead Budget


The FOH should be budgeted separately for the fixed overhead and the variable overhead
components.

Fixed overhead is constant in total and the fixed overhead rate is computed based on the normal
capacity. Since the fixed overhead is based on the normal capacity, for budgeting purposes only,
the standard fixed overhead rate is constant.

Total Variable Costs change in relation to the level of production while unit variable cost is
constant.
Budgeted Var. OH (BUDGETED PROD * STD. VAR OH PER UNIT) xxx
Budgeted Fx OH (NORMAL CAP * STD FX OH RATE PER UNIT) xxx
Budgeted Total Overhead xxx

The Marketing and Administrative Expense Budget


As with overhead costs, marketing and administrative expenses are also made up of fixed and
marketing variable components. Same rules apply with Factory overhead budget for variable or
fixed costs classified for marketing and administrative purposes.

The Cash Budget


Cash may be considered as the alpha and omega of the business process. Investors interest
would boil down to the ability of the business to return their money and how much more could be
given to them as premium for accepting risk of investing in business. An analysis of inflows and
outflows would provide management vital information on the liquidity of business.
Cash Balance – beg xxx
Add: Cash Receipts xxx
Total Cash for Use xxx

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lOMoARcPSD|5649527

MINDANAO STATE UNIVERSITY - GENERAL SANTOS CITY


COLLEGE OF BUSINESS ADMINISTRATION AND ACCOUNTANCY
DEPARTMENT OF ACCOUNTANCY

Less: Cash Payments (xxx)


Cash Balance before Financing xxx
± Financing Cash xxx
Cash Balance – end xxx

APPLICATION
For application and further understanding of the master budget, please open the URL following this
Module. The master budget of Hupana Running Company.

REFERENCES:
Agamata, F. T. (2014). Management Services. Davao City: CERTS Publication.
Cabrera, M. E. (2020). Strategic Cost Management. Manila: GIC Enterprises and Co.
Roque, R. S. (2016). Reviewer in Management Advisory Services. Manila: GIC Enterprises and Co. .

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