THE COSTS
MASTER BUDGET


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       Manufacturing operations require a series of budgets that are linked together in a master budget. The main parts of a master budget are as follows:

                   Budgeted Income Statement                                             Budgeted Balance Sheet
                       Sales budget                                                                         Cash budget
                       Cost of goods sold budget                                                     Capital expenditures budget
                           Production budget
                           Direct materials purchases budget
                           Direct labor cost budget
                           Factory overhead cost budget
                        Selling and administrative expenses budget

       The following exhibit shows the relationship among the income statement budgets. The budget process begins by estimating sales. The sales information is then provided to the different units to estimate the production and selling and administrative budgets. The production budgets are used to prepare the direct materials purchases, direct labor cost, and factory overhead cost budget. These three budgets are used to develop the cost of goods sold budget. Once these budgets together with the budget for administrative and selling expenses have been developed, the budget income statement can be prepared.

    Income Statement Budget

       After the budgeted income statement has been developed, the budgeted balance sheet can be prepared. Two major budgets comprising the budgeted balance sheet are the cash budget and the capital expenditures budget.



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