Master Budget Key Takeaways
Sales Budget is the first budget prepared. Budgeted sales unit x budgeted sales price = Budgeted Sales Revenue.
For a Merchandising company, the next budget is Purchases budget. It uses the Sales Budget and the merchandise inventory account. Budgeted Sales units + Desired Ending Mdse Inventory – Beg. Mdse Inventory = Units to be purchased. Take units to be purchased x cost per unit for the total cost of merchandise purchases.
For a Manufacturing company, the next budget is a Production Budget. It uses the Sales Budget and the Finished Goods Inventory account. Budgeted Sales units + Desired Ending Finished Goods Inventory – Beginning Finished Goods Inventory = Units to be produced.
A manufacturing company also uses a Direct Material, Direct Labor and Mfg Overhead Budget:
- Direct Material Purchases budget uses Production Budget and raw materials inventory. Units to be produced from Production Budget x materials required per unit = Materials needed in production + Desired Ending Raw Materials Inventory – Beg. Raw Materials Inventory = Direct materials to be purchased x cost of materials = Total cost of materials to be purchased. Direct material cost per unit is materials required per unit x material cost per unit.
- Direct Labor Budget uses the Production Budget. Units to be produced from the Production Budget x direct labor required per unit = Direct labor hours needed x labor rate per hour = Total direct labor cost. Direct labor cost per unit is direct labor required per unit x labor rate per hour.
- Mfg Overhead Budget uses the Production Budget and reports overhead as variable and fixed. Variable overhead is calculated as units to be produced x variable overhead per unit. Fixed overhead does not change based on volume. Total Variable and Fixed Overhead = Total Overhead Costs – Depreciation since it is a non-cash expense = Total Cash Payments for overhead (you will use this for the cash budget). Mfg overhead per unit is calculated as Total Overhead cost with depreciation / Units to be produced. This is typically calculated for the year instead of each month or quarter.
Selling and Administrative Budget applies to all companies – service, merchandiser, or manufacturer. List all selling and administrative items – if they are variable, take the budgeted SALES units x variable cost per unit. For fixed costs, they do not change with volume. Total Variable and Fixed Selling and Admin Expenses – Depreciation (since a non-cash expense) = Total Cash Payments for Selling and Administrative (you will use this for the cash budget)
Budgeted Income Statement applies to a service, merchandising and manufacturing company. You will use all previous budgets. Make sure to use BUDGETED SALES UNITS in your variable cost calculations. For a manufacturer, calculate cost of goods sold for each product cost: direct materials, direct labor, and mfg overhead. For direct materials, take budgeted sales units x DM cost per unit. For direct labor, take budgeted sales units x DL cost per unit. For mfg overhead, take budgeted sales x MFG OH Cost per unit. Formula for budgeted income statement is Sales Revenue – Cost of Goods Sold = Gross Margin (or gross profit) – Selling and Administrative Expenses = Income before taxes.
Cash Budget is based off the estimated cash collections from Sales and the estimated cash payment from purchases (use purchases budget for merchandiser and direct material purchases budget for manufacturer). Get the other cash payments from direct labor budget, mfg overhead budget (both for manufacturer only), selling and administrative budget (remember to use the CASH PAYMENTS amount which excludes depreciation). Total Cash Collections – Payments for Purchases – Other Cash Payments = Excess of collections over payments + Beg. Cash Balance = Ending Cash Balance.
****REMEMBER: The ending balance of one period is the beginning balance of the next period. This applies to CASH, Accounts Receivable, Inventory accounts, Accounts Payable and Retained Earnings.****