The Master Budget or Profit Plan is a comprehensive set of budgets covering all phases of an organization’s operations

1.   The Sales Budget, including a Schedule of Expected Cash Collections from Customers (Cash Receipts Budget).

2.   The Production Budget or (Merchandise Purchases Budget for a merchandising company).

3.   The Direct Material Purchases Budget, including a Schedule of Expected Cash Disbursements for Purchases

4.   The Direct Labor Budget

5.   The Manufacturing Overhead Budget (Not Covered).

6.   The Selling & Administrative Expense Budget (Not Covered).

7.   The Cash Budget

8.   Budgeted Financial Statements, including the Income Statement and Balance Sheet 

forecast of expected future sales from the sales department.  The sales department uses the following information to estimate sales quantities and prices

·        Past Sales Levels & Trends

►       For the Firm Developing the Forecast

►       For the Entire Industry

·        General Economic Trends

·        Economic trends in the Company’s Industry

·        Other Factors

The Sales Budget is as follows:

Expected sales in units à Used in the Production Budget

      x   Selling price per unit

      Sales in Dollars (revenue) Used in the Cash Receipts Budget and Budgeted Income Statement 

the number of units to be produced during a budget period.  The company needs to be able to cover Budgeted Sales (from above) and provide for the desired Ending Inventory.  A portion of the Finished Goods may already exist in the form of beginning inventory.  The remainder will have to be produced.

Step 2: The Production Budget

The formula is as follows:

Expected Sales in Units

+Desired Ending Inventory of Finished Goods

-Beginning Inventory of Finished Goods

Step 3: Direct Materials Budget

The formula is as follows:

Number of units to be produced

*RM required per unit

Production Needed

+Desired Ending Inv of RM

-Beg Inv of RM

RM to be Purchased

*Cost/Unit

details the expected cash payments during the period.  The key point to completing the schedule is that you need to determine when the expense will actually get paid.

is used to identify the size of the work force.  It shows what kind of labor force will be needed throughout the year to meet production needs and allows the company to plan to for hiring, firing and training of personnel.

Step 4: Direct Labor Budget

The formula is as follows:

Number of units to be Produced

*DL Hours required per unit

Total DL hours needed

*DL Rate

calculates the expected change in the cash balance during the period and the expected ending cash balance.  The Cash Budget is very similar to a company’s cash flow statement 

The formula for the cash budget is as follows:

Beginning Cash Balance

+Cash Receipts

- Raw Material Purchases

- Direct Labor Costs

- Manufacturing Overhead Costs

- Sales and Admin Costs

- Income Taxes

- Investment in Capital Expenditures

-Dividends

Excess/Deficiency

+/- Financing (Borrowing from a Bank)

-Interest on Borrowing

Desired Ending Cash Balance

shows the expected revenue and expenses for the budgeted period assuming the planned operations are carried out. It tells the company how profitable operations are anticipated to be in the forthcoming period.  Also after it is developed, it stands as a benchmark against which subsequent company performance can be measured.

[image][image]The budgeted income statement is exactly like a normal income statement:

shows the expected end-of-period balances for the company’s assets, liabilities and owner’s equity assuming that planned operations are carried out.