Master Budgets

Submitted by sylvia.wong@up… on Mon, 08/29/2022 - 18:42
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A master budget is an integrated budget that combines budgets from different areas of the business. In most instances, these budgets are prepared every month. The aim of developing a master budget is to provide a “roadmap” for achieving the organisation's goals.

The following are examples of departmental budgets which form the master budget:

  • Sales budget
  • Cost of goods sold budget
  • Purchases budget
  • Operating expenses budget, including administration, selling and financial expenses budgets
  • Cash budget
  • Income statement budget
  • Balance sheet budget.

The following example illustrates the integration of the budgets listed above to form the master budget.

Example

A close view of traders watching stock prices on computer screens

Plassimo Trading Services has the following ledger account balances as of 30 June.

Cash $25,000
Non-current assets  $200,000
Capital $225,000

The following data is provided on 1 July.

Expected sales  $260,000
COGS (20% of sales)  
Purchases  $58,000
Administration expenses (subject to GST) $22,000
Selling expenses (subject to GST) $18,000
Financial expenses (interest and bad debts) $10,000
Administrative salaries $55,000
New computer equipment (subject to GST) $12,000

NB: Sales and purchases are subject to GST in the cash budget.

Example 16: Preparation of a master budget for a trading industry – ¼

Example

The following budgets have been prepared from the above data:

Sales budget   

Expected Sales $260,000

Purchases budget   

Purchases $58,000

COGS budget   

COGS $52,000

NB: The purchase budget exceeds the COGS budget by $6,000. As no opening stock is recorded, the closing stock must equal $6,000 as of 30 June.

Administrative expenses budget   

Expenses (subject to GST) $22,000  
Administrative salaries $55,000 $77,000

Selling expenses budget    

Expenses (subject to GST) $18,000  
Sales salaries $60,000 $78,000

Financial expenses budget   

Interest and bad debts $10,000 $10,000

The following is the worksheet for the cash budget.   

  $
Receipts subject to GST  
Sales  260,000
Plus, GST 26,000
Total receipts 286,000
Payments subject to GST  
Purchases  58,000
Administration expenses  22,000
Selling expenses 18,000
New computer equipment 12,000
Total payments for GST 110,000
Plus, GST 11,000
  121,000
Payments not subject to GST  
Financial expenses 10,000
Administrative salaries 55,000
Sales salaries 60,000
Total payments not subject to GST 125,000
Total payments 246,000

Cash budget

  $
Cash receipts 286,000
Less cash payments 246,000
  40,000
Add cash on hand at 30 June  25,000
Total $65,000

Income statement budget:

    $
Sales   260,000
Less COGS   52,000
Gross profit   208,000
Administrative expenses 77,000  
Selling expenses 78,000  
Financial expenses 10,000  
Total expenses   165,000
Net profit   $43,000

Balance sheet budget:

    $
Assets    
Cash 65,000  
Inventories (closing stock) 6,000  
Current assets 71,000  
Non-current assets    
Assets 200,000  
New computer equipment 12,000 212,000
Total assets   283,000
Liabilities    
GST payable   15,000
Net assets   268,000
Owner’s equity    
Capital   225,000
Add net profit   43,000
Total owner’s equity   268,000

Note: 

GST payable = $26,000 (sales) – $11,000 (purchases and other payments) 

In the example above, receipts were received in the same month of sales and payments for purchases paid in the month of purchase. This may not always be the case. There may be receipts and payments outstanding at the end of the period. These amounts must be included in the Balance Sheet budget as Accounts Receivable and Account Payable. 2

Example 19: Preparation of a master budget for a trading industry 

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