DPM 3200

Lecture 7

The Master Budget

Preparation

1
 Advantages of Budgets

Goals and
Budgets
objectives

A budget allows systematic rather

than chaotic reaction to change.

2
Advantages of Budgets

Compels
managers
to think Provides definite
ahead expectations that
are the best framework
to evaluate performance

Aids managers in
coordinating their efforts
3
 Master Budget
Sales and Cash Collections

The master budget Production

summarizes the Direct Materials
planned activities
Direct Labour
of all subunits of
an organization. Selling & Admin Costs.

Budgeted Income Statemen

4
 Cash Collections

It is easiest to prepare budgeted

cash collections at the same
time as the sales budget.

Cash collections include the current

month’s cash sales plus the
previous month’s credit sales.

5
 Production Budget

Production Budget
= Sales Units
+ Ending Finished Goods
– Beginning Finished Goods

6
Direct Materials Budget

Direct Materials Budget

= Units to Be Produced
x Materials per Unit
+ Ending Materials Inventory
-Beginning Materials Inventory
x Cost

7
Direct Labour Budget

Direct Labour Budget

= Units to Be Produced
x Direct Labour per Unit
x Labour Rate per Hour

8
 Selling and Administrative Costs
Budget

Selling and Administrative Costs Budget

= Total Variable Selling and Administrative Costs
+ Total Fixed Selling and Administrative Costs

9
Budgeted Income Statement

Budgeted Income Statement

= Sales Revenue
-Total Variable Costs
= Contribution Margin
- Total Fixed Costs
= Operating Income
-Taxes
= Net Income

10
 Budgeted Balance Sheet

The final step in preparing the master budget

is to construct the budgeted balance sheet
that projects each balance sheet item in
accordance with the business plan.

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