Universidad Pontificia Bolivariana Nombre: Carlos L Gómez Valencia

Centro de Lenguas ID: 000179403

THE MASTER BUDGET

The Master Budget for a profit oriented organisation seeks to build a set of interrelated budgets
which provide a complete "picture" of the operations of the business over some future period,
usually twelve months. The elements of the master budget addresses both operating and
financial concerns. The major elements of the Master Budget are:

The Operating Budget is made up of the Sales Budget, Production Budget and Expenses
Budget. As the name suggests the sales budget forecasts the sales for the company over the
budgeted horizon. As we will explore shortly, the sales budget will for many business be a
budget by product or
product line and by
territory, again
depending on the
nature of the business.
Sales
Budget
The Production
budget for a
Production manufacturing firm
Budget will seek to budget the
costs of producing the
Expenses finished goods
Budget including the cost of
raw materials and
direct labour that go
Capital into the manufacturing
Budgeted
Expend . process as well as
Balanced
Cash Budget overheads in the
Sheet
Flow manufacturing process
Budget such as the cost of
buildings, light, heat
power and supervisory
Income Statement Elements staff within the
factory. The expenses
Funding Elements budget are for the
various sales and
administrative costs of doing business.

***The Financial Budget is made up of the Cash Flow and Expenditure Budgets and the
Budgeted Balance Sheet. The Capital Expenditure budget seeks to budget for purchases of
capital items that is necessary for the operations of the business over the coming years. The
budgeted Balance Sheets shows the funding impact of factors such as the level of Accounts
Receivable flowing from the level of budgeted credit sales.

The Cash Flow budget is the "glue" which binds the whole budget together. Every budget
decision from the level of sales to labour costs and spending on capital items has some impact
on cash flows. The cash flow budget seeks to show the cash funding necessary for the budget
period.
The production budget for manufacturing firms is made up of three elements:
* Raw Materials budget which establishes the cost of the material content of the production
process
* Direct Labour budget which budgets for the cost of those staff directly involved in the
production of manufactured products
* Overhead budget

The expenses budget is made up of:

* Selling expenses which includes distribution costs, sales and marketing expenses
* Administrative expenses which includes the cost of overall corporate management and
financing costs.

SALES BUDGET
The sales budget is the most important element in the master budget as all other budget
assumptions flow from the sales forecasts in the budget. While it can readily be seen that the
cost of raw materials and direct labour are directly related to the level of sales, it might not be
so obvious how other budget elements relate. Here are some relationships:
* The level of capital expenditure will depend on the level of sales. If a company is showing
rapid sales and therefore production growth, there may not be sufficient manufacturing
capacity and the company will need to buy more capacity. This will require capital
expenditure.
* The level of sales which are on credit will influence the Balance Sheet because it drives the
level of Accounts Receivable
* The level of sales will drive selling and marketing expenses because extra sales means extra
distribution costs and may relate to bonuses paid to the sales force
* The mix of sales can relate to the level of selling and marketing expenses. If a company is
introducing a new product there may be a high level of sales expenses as new advertising
campaigns are ramped up
* The sales made by a company generates a positive cash flow and so the level of sales are
important in determining the cash flow of the company and, in turn, the cost of debt finance
for the business

The sales budget can be expressed in a number of different ways. Some of the possible
combination of factors in which the management of the company might be interested in
reviewing the budget targets are:
The factors in which management might be interested are:
* Product: Here the management will wish to know sales revenue by product line. Budgets
may differ from
company to
Sales Budget
company. For
some companies,
it will be possible
Production Selling Admin
budget budget budget
to budget down to
the individual
product line and
show budgeted
Direct Direct manufacturin Capital product sales by
materials labour overhead Expend product code in
budget budget budget Budget terms of units of
production and
revenue per item.
An example of a
Budgeted Budgeted
Inventories Income
company which
Budgeted Statement will wish to
Balance budget in this
Sheet manner is a motor
vehicle
Cash Flow
Budget
manufacturer which will budget not only for the general model but also variations within a
model. There will be different revenues per unit for a top of the range model than for the entry
level model within that range. It is also very likely that there will be different gross margins for
the different models within a range not only in terms of the products.
* Period: The periods into which the budget may be divided might be by quarter, by month or
even in some companies, by week. As discussed above, the overall budget will typically be for
a financial year.
* Sales territory: As well as breakdowns by product, it will often be necessary to analyse
budgeted sales by sales territory. This might be based upon a geographic territory within a
country, a breakdown by countries or regions and in some cases by class of customer. An
example, for a software company, might be sales through sales channels such as local agents,
direct phone sales and licensing arrangements with major customers such as government
departments or large companies.
I. Match the following terms with their definitions:
( 2 ) Sales budget, production budget and 1. Selling
expenses budget make up this kind of expenses.
budget.
( 4 ) This budget seeks to budget for purchases 2. Operating
of capital items. budget.
(5) The costs of producing the final goods,
including the cost of raw materials and 3. Cash flow
direct labor and other manufacturing costs budget.
are budgeted by this kind of budget.
(3) this budget is necessary to have the whole 4. Capital
(master) budget together. expenditure
(1) distribution costs, sales and marketing budget.
expenses are included in this component of
the expenses budget. 5. Production
budget.

II. Answer the questions.

1. Which budgets are part of the Income State Elements in a profit

oriented organization?
Sales budget
Production budget
Expenses budget

2. Why is the sales budget important?

Because, it is directly related to the level of sales

3. Why is the cash flow budget important?

Because Cash Flow budget is the "glue" which binds the whole
budget together

4. In the case of manufacturing firms the production budget is

formed by three elements: raw materials budget, direct labour
budget and overhead budget.

5. Can the sales budget be expressed only in one way?

No, the sales budget can be expressed in a number of different
ways

III. Are these sentences (T)rue or (F)alse?

1. (T) In a profit oriented company, the master budget interrelates

different budgets and gives a complete point of view of the
negotiations in a certain period of time, normally one year.
2. (F ) The sales budget predicts the possible amount of sales for the
company in a future period of time.
3. (F) The costs of direct labour are included in the financial budget.
4. (T) The costs of buildings, energy and administration are part of
the production budget.
5. ( F ) The periods of time for a budget can’t be flexible. A budget
has to be prepared for one year only.

IV. Convert the following diagram into paragraphs. Use phrases such
as
• IS FORMED BY, • SEEKS TO,
• IS REPRESENTED BY, • SHOWS,
• GO (GOES) INTO, • ESTABLISHES,
• IS MADE UP OF, • HAS # ELEMENTS,
• CONTAINS, • CONSISTS OF,
etc. to complete simple sentences and connect the terms and
elements in the paragraph. The first statement is done for you as
an example and you have to continue the rest of the short
composition:

P r o d u c t io n B u d g e t f o r a m a n u f a c t u r in g f ir m

R a w M a t e r ia ls B u dD g i r e e t c t L a b o r B u d g Oe t v e r h e a d B u d g e t

P a p e r f o r p r in t in g mA av ne ru a a g l se c o s t o f D i I r ne cc i t d e n t a l m a t e r ia ls
la b o r p e r h o u r

I n t e r n a l e le m e n t s H o u r s o f D ir e c t I d le t im e
c ir c u it r y la b o r p e r u n it

W ir e , s c r e w s , g l u e , Ue tn c i t s p r o d u c e d F a c t o r y r e n t

D is k e t t e s L e a s e c o s t s

B o x e s o r b a g s p o w e r a n d
m a in t e n a n c e

Q u a lit y a s s u r a n c e

S u p e r v is io n a n d
f a c t o r y m a n a g e m e n t

The production budget for a manufacturing firm is mainly formed

by the raw materials budget, the direct labour budget, and the
overhead budget.

The raw materials budget includes items such as…paper for printing
manual, internal elements circuitry, wire, screws, glue, disckettes
and boxes or bags.
The direct labour budget is formed by average cost of direct labor
per hour, hours of direct labor per unit, units produced.

Finally, the overhead budget contains incidental materials, idle time,

factory rent, lease costs, power and maintenance, quality assurance
and supervision and factory management.