Chapter 10: Master Budget

Question 1

What is a master budget? What are the key types of master budget? What are some key benefits and issues that can come with a master budget?

Answer 1

-A master budget is a budget that is a quantitative expression for a set time period of a proposed future plan of action by management.
-There are the following types of master budget:
1) Static vs Flexible Budget
2) Short Term(Operations) vs Long Term(Capital)
3) Incremental vs Zero-based
4) Rolling budget
5) Kaizen Budget(continuous improvement: reduction in labour or material costs, unfavored variances will be reported).
-Key benefits include that it compels planning, provides performance criteria, and promotes communication and coordination within the company.

Question 2

What is the starting point of the entire budgeting process?

Answer 2

The starting point of the entire budgeting process is the sales budget.

Question 3

How does the sales budget lead to the prodution or merchandise purchase budget?

Answer 3

-The sales budget tells us how many units we expect to sell-Based on this we can calculate how many units need to be produced (or purcahsed) using the formula: Sales+Ending Inventory-Beginning Inventory=Required Production.
-This drives the direct materials, labour, and overhead budgets for manufacturers, or the merchandise purchases budget for retailers.

Question 4

How does the sales budget influence the SG&A budget?

Answer 4

-Many selling and administrative costs vary with sales volume(e.g. commissions, shipping, marketing).
-The sales budget helps estimate how much to budget for variable operating expenses.
-These operating expenses are later used in the budgeted income statement.

Question 5

How does the sales budget affect the AR schedule and cash budget?

Answer 5

-Not all sales are collected in cash immediately, and many are on credit.
-The sales budget helps estimate how much will become accounts receivable and when it will be collected.
-This helps to prepare an AR schedule and project cash inflows, both of which feed into the cash budget.

Question 6

How does the purchase budget link to the accounts payable schedule and cash budget?

Answer 6

-Based on how much raw material (or inventory) is purchased, the company owes money to suppliers.
-If purchases are made on credit, we prepare an AP schedule to track payment timing.
-This feeds into the cash budget by projecting cash outflows needed to settle those payables.

Question 7

What are the components of the Cost of Goods Sold budget?

Answer 7

1) Merchandise Budget
2) Production Budget: Includes DM, DL, and MOH all budgetted of course.

Question 8

How is the cash budget structured?

Answer 8

-Cash Beginning Balance+Cash Receipts(Cash Sales, AR)=Total Cash Available
-Total Cash Available-Cash Disbursements(Cash Purchases, AP, Op Exp, Taxes, (Not including Amortization)=Preliminary Balance(Surplus/Deficit)
-Preliminary Balance+/- Financing Requirements=Cash Ending Balance

Question 9

How do we get the budgeted income statement and retained earnings?

Answer 9

Sales budget helps us to estimate cost of goods sold, which helps us to get out budgeted income statement and retained earnings.

Question 10

How does our sales budget help us to get our budgeted balance sheet?

Answer 10

-Our sales budget helps us to get out AR Schedule, Purchase Budget, and Accounts Payable Schedule and Cash Budget.
-That gives us our cash budget.
-Take our cash budget and add capital budget, and that brings us to the budgeted balance sheet.