What Are The Steps Involved In The Preparation Of The Master Budget

December 6th, 2009 Comments off
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Earlier article describe what is capital, operating, summary and master budget.

In brief, the master budget is the summary budget which consolidates the information from all subsidiary budgets. It usually comprises the budgeted Income statement, budgeted balance sheet and cash budget. The master budget is a very significant planning tool which is reviewed by the directors to see if it represents an acceptable plan for the organization for the forthcoming period.

The main steps to prepare the master budget:

  • Form a budget committee
  • Review the long-term plan
  • Identify the principal budget factor and prepare the budget for it
  • Prepare the sales budget
  • Prepare the finished goods stock budget and production budget
  • Prepare budgets of resources for production: viz:
  • Material usage budget, based on the production budget, showing quantities and perhaps the cost for each type of material used
  • Machine utilization budget, showing operating hours required on each  machine
  • Labor or wages budget, for all grades of labor
  • Prepare overhead cost budgets for maintenance, administration, distribution and others
  • Prepare the raw materials stock budget which will depend on the central plant’s needs for stock
  • Prepare the raw materials purchases budget in quantities and value for each type of material purchased. This budget is completed by adjusting the budgeted materials usage for the change in the raw materials stock budget
  • Prepare, debtors, creditors and cash budgets. The completion of the sales and purchases budgets allow budgets for debtors and creditors to be drawn up. The cash effects of all budgets are then summarized in the cash budget.
  • Co-ordinate and review budgets, a task which is facilitated by regular meetings of the budget committee. A review may indicate that some budgets need modifying to be compatible with others
  • Prepare the master budget, as a summary of all other budgets, and submit it to the board of directors for approval as plan for the following budget period.

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Financial Accounting

 
 

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