How to Complete a Master Budget in Managerial Accounting

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Making a master budget first requires formulating departmental budgets.
Making a master budget first requires formulating departmental budgets. (Image: Jupiterimages/Polka Dot/Getty Images)

A master budget is a company's plan setting anticipated sales, production, distribution and financing goals over a year. Managers create the master budget by preparing separate budgets in departments such as sales, production and labor. A well-planned master budget will clearly describe what the company expects to accomplish in the upcoming year and how it intends to finance its business operations. Preparing a master budget requires a high level of planning and preparation by managers.

Prepare a sales budget. A sales budget shows how many products a company expects to sell in the coming year and the unit selling price. Multiply the unit selling price by the total number of units expected to be sold to arrive at your project's sales budget.

Prepare a production budget. A production budget list the number of units to be produced for sale during the budgeted time period plus the number of units to be left available in company inventory. Add to the sales number the desired year-ending inventory and subtract the inventory available at the beginning of the period to arrive at your production budget figure.

Prepare a materials budget outlining the amount of raw materials needed to achieve the total production figure as well as ending inventory. The amount of raw materials needed for production plus the desired ending balance of raw materials yields the total materials required. Subtracting the inventory of raw materials available at the beginning of the period yields the materials budget figure.

Prepare a labor budget. A labor budget describes the amount of money required to pay for the number of labor hours necessary to achieve the budgeted production level. Multiply the amount of labor required in hours per unit produced by the total production figure to arrive at total labor hours. Multiply the total labor hours by the hourly labor cost to arrive at the labor budget figure.

Prepare the overhead budget, which describes all costs of production other than materials and labor. Include in this figure management salaries and money paid to the company's sales force and all other employees not directly related to production of the finished product.

Prepare a cash budget. The cash budget describes how the company will use its cash resources during the budget period. Identify all cash receipts to be collected during the budget period except for any finance funding. Identify all cash disbursements to be paid during the budget period. Subtract total disbursements from cash receipts and add the beginning cash balance to arrive at the excess or deficiency cash position. If the company operates at a cash deficiency, it will probably require some form of financing to support operations.

Prepare a budgeted income statement that describes the amount of profit the company expects to make based on its level of production and sales. The budgeted income statement is different from the income statement and allows management to evaluate the company's progress during the year.

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