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
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
