MASTER BUDGET

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Budgeting is a process. This means budgeting is a number of activities performed in order to prepare a budget. A budget is a quantitative plan used as a tool for deciding which activities will be chosen for a future time period.

Purpose of Budgeting

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In a business, the budgeting for operations will include the following:

- preparing estimates of future sales - preparing estimates of future cash

collections and disbursements - preparing estimates of the future day-to-

day activities of the organization - summarizing these estimates into an

income statement and balance sheet.

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The budgeted income statement and balance sheet are also known as pro-forma financial statements. Once prepared and approved, the budgeted income statement and balance sheet are used to control the future activities of the business.

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A sales budget is a detailed schedule showing the expected sales for the budget period; typically, it is expressed in both dollars and units of production. An accurate sales budget is the key to the entire budgeting in some way. If the sales budget is sloppily done then the rest of the budgeting process is largely a waste of time.

Sales budget

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The production budget is prepared after the sales budget. The production budget lists the

number of units that must be produced during each budget period to meet sales needs and to provide for the desired ending inventory.

Production budget

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Production requirements for a period are influenced by the desired level of ending inventory. Inventories should be carefully planned. Excessive inventories tie up funds and create storage problems. Insufficient inventories can lead to lost sales or crash production efforts in the following period.

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Direct materials budget is prepared after computing production requirements by preparing a production budget.Direct materials budget or materials budgeting details the raw materials that must be purchased to fulfill the production requirements and to provide for adequate inventories.

Direct materials budget

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The direct labor budget is developed from the production budget. Direct labor requirements must be computed so that the company will know whether sufficient labor time is available  to meet the budgeted production needs. By knowing in advance how much labor will be needed throughout the budget year, the company can develop plans to adjust the labor force as situation requires. Companies that neglect to budget run the risk of facing labor shortages or having to hire and lay off workers at awkward times. Erratic labor policies lead to insecurity and inefficiency.

Direct labor budget

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The manufacturing overhead budget provides a schedule for all costs of production other than direct materials and direct labor.

Manufacturing overhead budget

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After preparing sales budget,production budget,direct materials budget,direct labor budget, and manufacturing overhead budget the management has all the data needed to calculate unit product cost. This calculation is needed for two reasons: first, to determine cost of goods sold on the budgeted income statement and second, to know what amount to put on the balance sheet inventory account for unsold units. The carrying cost  of unsold units is calculated on the ending inventory finished goods budget.

Ending Finished Goods Inventory Budget

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A budgeted income statement can be prepared from the data developed in:

Sales budget Ending finished goods inventory budget Selling and administrative expense budget Cash budget The budgeted income statement is one of the key

schedules in the budget process. It shows the company's planned profit for the

upcoming budget period, and it stands as a benchmark against which subsequent company performance can be measured.

Budgeted income statement

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