MODULE 4

Management Advisory Services 2

SESSION TOPIC 5 : Master Budget

LEARNING OUTCOMES:
The following specific learning objectives are expected to be realized at the end of the session:
1. Discuss and give appreciation to the master budget

KEY POINTS

Master Budget Operating budget Financial budget

CORE CONTENT
Introduction:
This module covers the discussion of
a. Definition and coverage of the budgeting process
b. Master budget and its components (operating and financial budgets)
c. Types of budgets (static, flexible, zero-based, continuous)
d. Budget variance analysis (static and flexible)

IN-TEXT ACTIVITY
What Is a Master Budget?
The master budget is a comprehensive financial planning document. It usually includes all of the lower-level budgets
within the operating budget and the financial budget.

The operating budget shows the income-generating activities of the firm, including revenues and expenses. The result is a
budgeted income statement.

The financial budget shows the inflows and outflows of cash and other elements of the firm's financial position. The
inflows and outflows of cash come from the cash budget. As such, the result of the financial budget is the budgeted
balance sheet.

Companies use financial budgeting to facilitate planning and control within a business firm so that they can manage the
financial aspects of their business and plan for new product expansion in the future.

How a Master Budget Works

A strategic plan usually forms the basis for an organization's various budgets, which all come together in the master
budget. It usually coincides with the fiscal year of the firm and can be broken down into quarters and further into months. If
the firm plans for the master budget to roll from year to year, then it would usually add an extra month to the end of the
budget to facilitate planning. It is called continuous budgeting.

The budget committee usually develops the master budget for each year, guided by the budget director, who is usually
the controller of the company. They usually plan the operating budgets first since information from the operating budgets
is needed for the financial budgets.

What a Master Budget Includes

These are the most often used elements within the master budget of companies. Some firms may not use one or another
of the budgets, but most use some form of all of them. Service firms, for example, do not typically use production budgets.

Sales Budget
The first schedule to develop is the sales budget, which is based on the sales forecast. The sales budget is not usually the
same as the sales forecast but is adjusted based on managerial judgment and other data.

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Production Schedule
The second schedule for budget planning is the production schedule. The company must determine the number of sales
the company expects to make in the next year. Then, it must budget how many sales in units it needs to make to meet the
sales budget and meet-ending inventory requirements. Most companies have an ending inventory they want to meet
every month or quarter so that they don't stock out.

Direct Materials, Labor, and Overhead Budget

The next schedules are the direct materials purchases budget, which refers to the raw materials the firm uses in its
production process; the direct labor budget, which estimates how many hours of work and how many workers a company
needs; and the overhead budget, which includes both fixed and variable overhead costs.

Finished Goods Inventory and Cost of Goods Sold Budget

The ending finished goods inventory budget is necessary to complete the cost of goods sold budget and the balance
sheet. This budget assigns a value to every unit of product produced based on raw materials, direct labor, and overhead.

Administrative Budget
The selling and administrative expense budget deal with non-manufacturing costs such as freight or supplies.

Cash Budget
The cash budget states cash inflows and outflows, expected borrowing, and expected investments, usually on a monthly
basis. Any item that is not in cash, such as depreciation, is ignored by the cash budget.

Budgeted Balance Sheet

The budgeted balance sheet gives the ending balances of the asset, liability, and equity accounts if budgeting plans hold
true during the budgeting time period.

Capital Expenditures
The budget for capital expenditures contains budgetary figures for the large, expensive fixed assets for the business firm.

MASTER BUDGET

1. Sales Budget (This is the starting point of a master's budget. It is based on the projected sales set up by a
business based on past experiences.)

Items 1 2 3 4 Total
Budgeted Sales in Units 10,000 12,000 14,000 16,000 52,000
Selling Price per unit P100 P100 P100 P100 P100
Budgeted sales in Pesos P1,000,000 P1,200,000 P1,400,000 P1,600,000 P5,200,000

2. Production Budget (The budget that presents the number of units projected to be produced for a given period. The
budget starts with the budgeted sales in units)

Items 1 2 3 4 Total
Sales Requirements 10,000 12,000 14,000 16,000 52,000
Add: Desired FG Inventory End 8,000 10,000 12,000 14,000 14,000
Units to be Produced 18,000 22,000 26,000 30,000 66,000
Less: FG Inventory Beginning 6,000 8,000 10,000 12,000 6,000
Units to be Produced 12,000 14,000 16,000 18,000 60,000
Note that whatever is the ending inventory in one quarter, it is the beginning inventory in the next quarter.

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 3. Materials Purchase Budget (The budget that determines the units and value of raw materials to be purchased. It
starts with the units of product to be produced)

Items 1 2 3 4 Total
Units to be Produced 12,000 14,000 16,000 18,000 60,000
Multiply by: Production
Requirements for Materials 3 3 3 3 3
Total Materials Required for
Production 36,000 42,000 48,000 54,000 180,000
Add: Desired Inventory End 20,000 24,000 28,000 32,000 32,000
Total Materials Needed 56,000 66,000 76,000 86,000 212,000
Less: Inventory Beginning 14,000 20,000 24,000 28,000 14,000
Units of Materials to be
Purchased 42,000 46,000 52,000 68,000 198,000
Unit Purchase Cost P10 P10 P10 P10 P10
Materials Purchased Budget P420,000 P460,000 P520,000 :680,000 P1,980,000
Note: Production requirements for materials is the number of units of materials needed to produce one
unit of finished product.

4. Direct Labor Budget (Determine the amount of direct labor to be incurred in the production of the needed
products to meet the sales requirements. It starts with the units to be produced from the production budget)

Items 1 2 3 4 Total
Units to be Produced 12,000 14,000 16,000 18,000 60,000
No. of hrs. required to produce 2 2 2 2 2
one unit of product
Total Labor Hours 24,000 28,000 32,000 36,000 120,000
Rate per hour P20 P20 P20 P20 P20
Direct Labor Cost P480,000 P560,00 P640,000 P720,000 P2,400,000

5. Factory Overhead Budget (This budget represents all production costs outside of Direct Materials and
Direct Labor. This budget is usually based on Direct Labor budget at an established applied rate)

Items 1 2 3 4 Total
Direct Labor Budget P480,000 P560,000 P640,000 P720,000 P2,400,000
Applied FOH rate 80% 80% 80% 80% 80%
FOH Budget 384,000 448,000 512,000 576,000 1,920,000
Note: Applied rate is set up by the company based on experience. This is predetermined.
6. Selling and Administrative Expenses

Items 1 2 3 4 Total
Enumerate all the projected Assign budget for each expense category based on historical data

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 expenses of the company for the for at least the past three to five -year experience of the company.
year Budget shall be presented separately for selling and administrative
expenses.

7. Budgeted Income Statement

Prepare budgeted income statement based on the preceding budgets.

Items 1 2 3 4 Total
Budgeted Sales (from sales
budget)
Budgeted Cost of Sales
Materials Used (from materials
purchase budget)
Direct labor (from direct labor
budget)
Factory Overhead (from FOH
budget)
Total manufacturing Costs
Add: Work in process, beg. (from
the production budget)
Cost place into process
Less: Work in process, ending
(from the production budget)
Cost of goods manufactured
Add: Finished goods inventory
beg. (from the production budget)
Goods available for Sale
Less: Finished good inventory
end
(from the production budget)
Cost of Sales
Gross Profit
Operating Expenses (per budget)
Selling Expenses (from the
selling expenses budget)
Administrative Expenses (from
the administrative expenses
budget)
Budgeted Net Income

8. Cash Receipts Budget (Reflects budgeted cash collections from all sources)

Items 1 2 3 4 Total

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 Collections of Receivables from
previous years
Collections from Sales of Current
year
Cash receipts from other sources
Total budgeted cash collections
Note: cash collection from accounts receivable shall be based on the terms of sales. Example: 50% of sales is
collected in the month of sales, 30% in the month following sales, and 20% in second month following sales.

9. Cash Disbursements Budget

Items 1 2 3 4 Total
Payment of purchases from prior
years
Payment of Purchases for the
Current year
Cash payment for other liabilities
Total Cash Disbursements
Budget
Note: Payment of accounts payable from purchases shall be based on the purchase terms. Example:
Purchases is paid 30% in the month of purchase, 30% in the month following the mont of purchase, and 40% in the
second month following month of purchase.

10. Cash Budget

Items 1 2 3 4 5
Cash balance beginning
Add: Budgeted Cash Receipts
Total
Less: Budgeted Cash
Disbursements
Cash Balance ending
Note: The cash balance ending in one quarter is the beginning balance in the next quarter. The ending balance
in the fourth quarter is the amount to be presented as cash in the balance sheet.

11. Budgeted Statement of Financial Position

Assets
Current Assets Enumerate under this category all current assets
Non-current assets Enumerate under this category all non-current assets
Total Assets
Liabilities
Current Liabilities Enumerate under this category all current liabilities

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 Non-current liabilities
Total Liabilities
Shareholder's Equity
Shares of Stocks
Share premium
Retained Earnings
Total Shareholder's Equity
Total Liabilities and
Shareholder's Equity
Enumerate under this category all non-current liabilities
This amount must be equal to the total of liabilities and
shareholder's equity
Present under this category the amount of shares
issued by the company at par value
Present under this category the amount representing
stock issuance in excess of par value
Present under this category the amount of retained
earnings including the net income or loss of the period.
This amount must be equal to the total assets

SESSION SUMMARY
 A master budget is a comprehensive financial planning document that includes all of the lower-level budgets, cash
flow forecasts, budgeted financial statements, and financial plans of an organization.
 It's usually developed by a firm's budget committee, guided by the budget director.
 A master budget usually incorporates many elements, which may include the sales, production, administrative, direct
materials, labor, and overhead budgets.

SELF-ASSESSMENT
Assignment : Computation of master budget
Quiz : Problem on master budget

REFERENCES
Refer to the references listed in the syllabus of the subject.

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