The master budget is an essential part of any company's managerial accounting planning process. This budget is made up of several smaller budgets developed by different departments within the organization. When combined, these smaller budgets will lead to the preparation of pro forma or budgeted financial statements for the company. The master budget will typically have three end products: a cash budget, a budgeted income statement, and a budgeted balance sheet. These budgets and financial statements help managers plan and control their operations.
At A Glance
- Creation of the master budget involves the consideration of operating budgets to create pro forma financial statements.
- A master budget is composed of an operating budget and a financial budget, which are both made up from their own subbudgets.
- Since creating the sales budget is the first step in creating a master budget, it is crucial that the sales budget is accurate so that the remainder of the master budget is as precise as possible.
- The production budget indicates how much product must be produced each period.
- A company needs to identify its direct materials costs in order to create a budget.
Direct labor refers to the hours spent producing a product or providing a service that can easily be traced to the product or service.
- To create a budget, a company must identify its manufacturing overhead costs.
- The cost of goods sold budget shows the expenses a company incurs for producing a product.
- The cash budget is one of the most important components of the master budget.