THE MASTER BUDGET FRAMEWORK
The master budget is the overall quantifications of the budgeting plan. In it, functional budgets are incorporated. A functional budget is a budget if income and/or expenditure for a particular function. The master budget therefore combines all the budgets of the various departments in an organizations. It is useful in ensuring that all the individual budgets are consistent with one another and also presents a ‘unit’ picture of the entire organization.
It is made up of both production and non-production budgets.
|Production budgets include:
Non-Production Budgets Include
It gives volume of sales and sales mix of the current operations. The sales forecast is initially prepared and upon completion the sales budget is finalized. The following are usually considered in coming up with the sales forecast.
- Actual sales in the previous periods.
- Reports from salesmen.
- Market research information.
- Level of orders already obtained in advance.
It essentially forecasts what the company can reasonably expect to sell to the customer during the budget period.
It is the forecast of the products to be manufactured during the budget period to most forecasted sales above.
It is expressed as units of each type of product. The following are usually considered:
- Available production capacity.
- The sales forecast.
- Finished goods stock level policy.
The cycle for the preparation of the above budget usually is determined by the budget committee. It is as follows:
- Determine the production capacity available.
- Consider the possible ways in which the available production capacity may be expanded if required.
- Linkage of production capacity available to the stock level.
- Determine the detailed budgets within the production budget.
|6 (Units)||P (Units)||J (Units)|
|Required Stock 31/12/19-0||xx||xx||xx|
|Add: Sales during the year||xx||xx||xx|
|Less: Estimated Stock 01/01/19-0||(xx)||(xx)||(xx)|
It has two purposes
- Ensures that production is sufficient to meet sales demand.
- Ensures that economic stock levels are maintained according to the stock policy.
7.4.3 Direct Materials Budget
This budget shows the estimated quantities and costs of all the raw materials and components needed for the output demand by the production budget. This consists of:
- Direct Materials Usage Budget: Which shows the estimated quantities of materials required for budgeted production.
- Direct Materials Purchases Budget: It ensures that materials are within the planned materials stock levels i.e. after considering both usage material stock required.
Direct Labour Budget
It represents the forecasts of direct and indirect labour requirements to meet the demands of the company during the budget period.
The budgeted direct labour cost is therefore determined by multiplying direct labour hours with the wage rates for every category of labour.
Factory Overhead Budget
This budget represents the forecasts of all the production fixed and variable and semi-variable overheads to be incurred during the budget period.
The summation of budgeted costs of production for the budget period makes up Production Cost Budget. It includes:
- Budgeted Materials Cost
- Budgeted Labour Cost
- Budgeted Overhead Cost
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