CB2101 Chap.7 Master Budgeting
Master Budgeting
Follow the dependency chain
A master budget links sales, production, resource purchases, cash and financial statements. Each schedule depends on an upstream volume or timing assumption.
Production adjusts sales for finished-goods inventory, purchases adjust usage for raw-material inventory, and cash schedules translate accrual activity into collection and payment periods.
Make sales assumptions visible
Sales volume and price drive much of the operating plan. Document seasonality, capacity constraints and the source of any growth assumption rather than treating the forecast as a plug.
A changed sales plan should flow through production, resource use, receipts and statements. Updating only the revenue line leaves an internally inconsistent budget.
Reconcile finished-goods inventory
Production equals sales plus desired ending finished goods minus beginning finished goods. The wording fixes the signs: produce what will be sold, add what should remain and subtract what is already available.
Confirm that beginning inventory plus production minus sales equals desired ending inventory. If the policy refers to next month's sales, show that look-ahead base.
Translate production into resources
Material usage, direct labour and variable overhead follow production rather than sales. Purchases then adjust material usage for raw-material inventory using the same inventory logic.
Fixed overhead remains at its budgeted total within the relevant range, while noncash items such as depreciation must be identified before the schedule feeds the cash budget.
Separate accrual timing from cash
Cash receipts combine current and earlier sales according to collection percentages. Cash payments combine current and earlier purchases according to payment terms.
Arrange the schedule by origin month so each percentage applies to the correct base. Ending receivables and payables should match the uncollected and unpaid portions left by those schedules.
Use financing as the balancing section
Opening cash plus receipts minus operating and capital payments produces a preliminary balance.
Borrow enough to reach the required minimum, or repay debt only from genuine surplus after interest and policy constraints. Borrowing is not revenue and repayment is not operating expense. Finish by checking that closing cash and retained balances agree with the budgeted statements.
What this chapter covers
- 01
Sales budget
- 02
Production budget
- 03
Direct material purchases
- 04
Labour and overhead schedules
- 05
Cash receipts and payments
- 06
Budgeted financial statements
Worked example · free
Build production from sales and inventory policy
- 2Start with planned sales.
- 2Add desired ending inventory.
- 2Subtract beginning inventory and check.
Key terms
- Master Budget
- The linked collection of operating and financial plans for a budget period.
- Production Budget
- The units that must be produced to meet sales and finished-goods inventory policy.
- Cash Budget
- A schedule of expected cash receipts, payments, financing and ending cash.
Master Budgeting FAQ
Why does the sales budget usually come first?
Sales volume drives required production and many selling expenses. Production then drives materials, labour and manufacturing overhead. A changed sales assumption therefore propagates through the operating and financial schedules.
How do I avoid reversing inventory signs?
Write the physical identity in words. Required production equals sales plus desired ending finished goods minus beginning finished goods. Reconcile beginning plus production minus sales to the desired ending balance.
Why does budgeted revenue differ from cash receipts?
Revenue follows the sale, while cash follows the collection pattern. A portion of credit sales may be collected in later periods, so receipts combine current and earlier sales months according to their timing percentages.
How can I tell whether the master budget is internally consistent?
Reconcile each inventory equation, match cash receipts and payments to their timing schedules, and compare closing cash, receivables, payables and inventory with the budgeted statements. If an upstream assumption changes, trace it through every downstream schedule. A difference should lead back to a broken dependency; it should never be removed with an unexplained balancing amount.
Exam move
Draw arrows between sales, production, materials, labour, overhead, cash and the budgeted statements, and write the upstream source beside every volume. Reconcile each finished-goods and raw-material inventory equation locally. Arrange collections and payments by origin month so timing percentages cannot be applied to the wrong base, then use ending receivables and payables as checks.
Separate noncash depreciation before carrying overhead into the cash budget. Work a shortfall case from opening cash through receipts, payments, minimum balance and borrowing, keeping financing away from operating profit. Finally, change one sales or inventory assumption and propagate it through every affected schedule.
Any statement that no longer agrees identifies the first broken dependency rather than a place for a balancing plug.
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