The Master Budget
• The term “budget” is actually a shorthand term to describe several budget documents.
All of these documents are combined into a master budget.
• The master budget contains two classes of budgets.
• Operating budgets are the individual budgets that are used to prepare
the budgeted income statement. These budgets establish goals for the company‘s sales
and production personnel.
• Financial Budgets are the capital expenditure budget, the cash budget, and the
budgeted balance sheet. These budgets focus mainly on the cash resources that are needed
to fund expected operations and planned capital expenditures.
• We will use a case study of Hayes Company to illustrate the preparing of operating
• Hayes manufactures and sells a single product, Kitchen-mate.
• We will prepare the budgets by quarters for the year ending December 31, 2009.
• Hayes Company begins its annual budgeting process on September 1, 2008, and
completes the budget for 2009 by December 1, 2008.
• The sales budget is the first budget that is prepared.
• Each of the other budgets depends on the sales budget.
• The sales budget is derived from the sales forecast. It represents management‘s
best estimate of sales revenue for the budget period.
• The sales budget is prepared by multiplying the expected sales volume in
units for each product by its anticipated selling price per unit.
• For Hayes Company, the sales volume is expected to be 3,000 units in the first
quarter, with 500-unit increments in each quarter after that. • Sales price of $60 per unit.