The complete set of budgets that covers all aspects of the operations of an organization is referred to as the master budget. Preparing a master budget can be difficult, as there are so many variables at play. The first step is developing a sales forecast. Once a company has a sales estimate for the year, operational budgets can be prepared based on the estimated production needs. After this, the individual budgets can be prepared for each department.
The first budget prepared is the production budget, which shows the number of goods or services that will need to be produced during the period. Next, thedirect material budget is created to show the number of units and the total cost of all the necessary materials to be purchased during the period. Then, thedirect labor budget is prepared to show the total number of direct labor hours needed and the cost during the period. The manufacturing overhead budget is developed next to show the cost of all overhead expenses that will be incurred during the period. The selling, general, and administrative expense budget is then prepared, and this shows the total amount of selling, general, and administrative expenses for the period. Next, the cash receipts budget is prepared to show the entire expected cash inflows for the period. This is followed by the cash disbursement budget, which shows all expected cash payments for the year. Once this set of budgets is completed, budgeted financial statements are prepared. These statements provide a forecast of the overall financial performance of the organization, if everything goes as planned.
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