by Master Budget:
The collection of a series of subsidiary or functional budgets into a total or master budget is the outcome of the budgeting process.
The master budget which covers a definite period of time, such as a year, represents the overall plan of operations which the management develops for the company. The master budget formally expresses the managerial policies & goals for a specified period which, with respect to functions & organizational responsibilities are broken down into details.
The master budget together with the subsidiary budgets on completion will be submitted for approval to the budget committee.
Constituent Elements of a Master Budget:
A master budget comprises a number of functional & financial budgets.
Functional Budget: Functional budget is related to a major function of the business. The usual functional budgets are:
- Sales Budget: The sales in terms of quantity & value which are analyzed by the product, by region, by month, by salesman & by distribution channels are shown by this budget.
- Selling Expenses Budget: The salaries & commission of salesmen’s, expenses & other related costs is included in this budget.
- Distribution Expenses Budget: Charges for transportation, charges for freight, warehousing, stock control, wages, expenses & related administrative costs is included in this budget.
- Marketing Budget: Marketing budget, apart from details regarding advertising, activities related to promotion, market research, customers service, public relations & so forth; also includes a summery relating to sales, selling expenses & marketing expenses budgets.
- Research & Development Budget: Materials, salaries, expenses, equipment & supplies & other costs which are related with design, development & technical research projects are included in research & development budget.
- Production Budget: Production budget aims to supply specified quality of finished goods so that the marketing demands can be met. Levels of finished goods stock is specified by the distribution budget & for providing detailed production requirements this can be related with the sales budget. Following from this, consideration of a series of subsidiary budgets becomes necessary:
- Raw Materials Budget: Appropriate attention to the desired levels of stock is paid by this budget.
- Labour Budget: This budget ensures that at the right time the required number of employees with suitable skills & of suitable grade will be made available by the plan.
- Manufacturing Overheads budget: Items such as consumable materials & waste disposal is covered by this budget.
- Purchasing Budget:While preparing this budget along with the answers to the questions regarding when, where & at what price to buy & how often to buy, consideration has to given to raw materials, consumable items, office supplies & equipments & the whole range of requirements of an organization.
- Administration Expenses Budget: Such expenses as salaries & upkeep of office, salaries of management, stationery, telephones, depreciation, postage etc. are dealt with by this budget.
- Manpower Budget: An overall view of the need of the organization regarding manpower for all the areas of activity for a period of years-like manufacturing, administrative, sales, executive activities & so on, must be taken by the manpower budget. Training expenses budget & recruitment expenses budget can be formulated on the basis of the manpower budget & policies.
Prepare a materials purchase budget for the 3 months- January, February & March from the following information:
(a) Estimated sales of finished products:
January 12000 units
February 14000 units
March 16000 units
April 13200 units
May 16800 units
(b) It is required as per stocking policy to maintain at the end of the month a sufficient quantity of finished goods so as to satisfy 25% of the estimated sales for the following month. 3000 units were in stock on 1st January.
(c) The standard requirement of per unit material as per the standard card of the product is:
Standard quantity: Material X 2 kg @ $ 2.50 per kg
Material Y 4 Kg @ $ 1.50 per kg
Stoking policy required the maintenance at the end of each month, of a sufficient quantity of raw materials so that 50% of the production requirement of the following month can be met. The adherence of this policy is always required.
Solution:
Production Budget
Jan Feb Mar April
Units Units Units Units
Estimated Sales 12000 14000 16000 13200
Desired Closing Inventory equal
to 25% of sales demand for
following month 3500 4000 3300 4200
15500 18000 19300 17400
Opening Inventory (3000) (3500) (4000) (3300)
Budgeted Production (in units) 12500 14500 15300 14100
Material Usage Budget
Jan Feb Mar April
Kg Kg Kg Kg
Material X @ 2 Kg per unit 25000 29000 30600 28200
Material Y @ 4 Kg per unit 50000 58000 61200 56400
Material Purchase Budget
Jan Feb Mar
Material X:
Usage Quantities (Kg) 25000 29000 30600
Desired closing stock equal to 50% of
production requirements for following
month 14500 15300 14100
39500 44300 44700
Opening Inventory (12500) (14500) (15300)
Purchase Quantities 27000 29800 29400
Price per Kg $ 2.50 $ 2.50 $ 2.50
Value of purchases $ 67500 $74500 $ 73500
Material Y:
Usage Quantities (Kg) 50000 58000 61200
Desired closing stock equal to 50% of
production requirements for following
month 29000 30600 28200
79000 88600 89400
Opening Inventory (25000) (29000) (30600)
Purchase Quantities 54000 59600 58800
Price per Kg $1.50 $1.50 $1.50
Value of purchases $ 81000 $ 89400 $ 88200
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