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Preparing the Master Budget

Preparing the Master Budget

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The master or static budget is prepared for a single level of volume based on management’s best estimate of the level of production and sales for the coming period. The master budget is usually prepared one year in advance, corresponding with the company’s fiscal year.
The master or static budget is prepared for a single level of volume based on management’s best estimate of the level of production and sales for the coming period. The master budget is usually prepared one year in advance, corresponding with the company’s fiscal year.

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Published by: ClassOf1.com on Aug 08, 2013
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12/08/2013

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FinancialAccounting
 
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Subect: Financial Accountin
Preparing the Master Budget
The master or static budget is prepared for a single level of volume based on management’s best
estimate of the level of production and sales for the coming period. The master budget is usually 
prepared one year in advance, corresponding with the company’s
fiscal year. It is often divided intothe four calendar quarters of the year, with the upcoming quarter broken down further intomonths.
Many companies prepare a continuous or rolling budget that ‘‘rolls forward’’ so that as one month
or quarter is completed a new month or quarter is added at the end of the budget, resulting in a budget that is always one year in advance. Advocates of continuous budgeting argue that it causesmanagers to have a more long-term perspective, rather than just concentrating on the next monthor quarter. The master budget includes operating budgets and financial budgets.Operating budgets include components of the pro-forma (projected) financial statements, such asthe sales and production budgets that are part of the budgeted income statement. Operating budgets are stated in both units and dollars. Financial budgets include the budget balance sheet, budgeted retained earnings statement, and budgeted cash flows statement, as well as the cash andcapital expenditures budgets. Details from the operating budgets are incorporated into the financial
 budgets to determine the organization’s generation and use of funds for the period.
The budgeting process for a manufacturer is much more complex than that for a merchandising orservice business. Manufacturers have to budget for the acquisition of raw materials and labor, as well as for the incurrence of a significant amount of manufacturing overhead costs. In contrast,merchandisers purchase products in their final form, and service businesses provide a servicerather than a product, thus simplifying the budgeting process.In preparing operating budgets, management must consider all the items of revenue and expense.The usual starting point in the budgeting process is a sales budget, followed by a determination of 
 
 *
The Homework solutions from Classof1 are intended to help students understand the approach to solving the problem and not forsubmitting the same in lieu of their academic submissions for grades.
Subect: Financial Accountin
inventory policy, a production budget, budgets for direct materials, direct labor, factory overhead,and then cost of goods sold, plus budgeted selling and administrative expenses, all culminating in a budgeted income statement.The sales budget projects the volume of sales in both units and dollars. In estimating the sales forthe coming year, the sales department must take into consideration present and future economicsituations. It should research and carefully analyze market prospects for its products and giveconsideration to the development of new products and the discontinuance of old products. Itshould make these analyses by territory, by type of product, and possibly by type of customer.Marketing researchers should also carefully survey and evaluate consumer demand.

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