The master budget refers to incorporation of various departmental budgets. It helps to ensure coordination, efficiency and consistency o all the departmental budgets. The departmental budgets on the other hand outlay the revenues and costs incurred by the particular departments. The components of the master budget include the sales budget, production budget, the direct materials budget, the direct labor budget, the factory overhead budget and the non-production budgets (Samuels, 2017).
Components of the master budget
It refers to a sales forecast the company expects in the coming budgeted period. The sales budget is divided into items, their respective quantities and amounts realized after sales.
Total budgeted sales = unit selling price (anticipated volume in units)
The sales budget is the most crucial element in the process of budgeting and carefulness and correctness should be prioritized in its preparation. All the parts of the master budget are dependent on the preparation of the sales budget. The units to be produced by the company depend on the market demand and the units already produced (Weygandt, 2015). If the budgeted sales are not exact and free from errors, the errors will be replicated in production. Therefore, the estimated units to be produced for the coming year will be incorrect.
The forecasted sales information derived from the sales budget figures directly affects the production budget as it helps derive the direct materials budgets and the direct labor budget. Management will also be able to forecast the production capacity required to enable optimized production and reduced production costs. Through proper estimation of the production capacity, managers will be able to formulate the overhead and selling and administrative expenses budget. All total sales contained in the sales budget will also be utilized by forwarding it to the revenue section of the master budget.
Refers to a summary of the factors required to in the production process for the upcoming period. When initiating the production budget, the budget committee needs to match it with the sales budget. Management needs to ensure that closing stocks are properly budgeted to help avoid maintaining high stock amounts in the organization. Proper budgeting for closing inventory will help minimize costs associated with holding (Weygandt, 2015). Maintaining optimal stock levels will inhibit expenses associated with a shortage and unnecessary orders. The production budget contains unit amounts of various products to be produced. When creating the budget, one should consider the firms forecast on sales and plant capacity.
Direct Materials Budget
A direct materials budget refers to a detailed summary showing the forecasted volumes and costs associated with all the materials required in production. Therefore, the creation of the direct materials budget is dependent on the initiation of the production budget. The budget committee has to properly account for the raw materials required for production (Weygandt, 2015). It shows the materials required for production. It’s comprised of:
Direct material usage budget: outlays the forecasted volumes of raw materials required to initiate the budgeted production process.
Direct materials purchase budget: it helps maintain the materials within the required inventory levels. It is prepared after considering the material use and required units.
Direct labor budget
The direct labor budget is dependent on the estimated production budget. The production budget comes before the direct labor as it shows the estimated amount of labor time needed to avail the production process (Samuels, 2017). Management is thus able to note if they have adequate labor hours to enable production. Helps estimate its labor requirements and the costs to incur on the labor.
Direct labor cost budget=standard wage per hour (total number of hours)
Factory overhead budget
It is a detailed summary of all the forecasted costs except the direct ones associated with the organization. It shows all the estimates about production, fixed, variable and semi-variable overheads.
Sales and distribution cost budget
Sales and distribution cost budget refers to estimated costs on sales and distribution for the upcoming budgeted period (Samuels, 2017). It relates to the sales budget as it prioritizes on forecasted sales quantities for the coming operational period. The costs include sales staff remuneration, commission and publicity costs.
Administration costs budget
It incorporates all the costs that are not associated with production. The organizational functions prepare their budgets, and the costs contained include secretarial, management and administrative expenses (Samuels, 2017).
Research and development cost budget
The research cost budgets are prepared to help the company carry out market research to gain more insight on industrial performance. It helps the company initiate exploration and study to help meet its goals. On the other hand, the development cost is the cost associated with innovation to help improvise and improve the organization’s products and frameworks.
The cash budget outlays the forecasted cash flows in the organization for the budgeted period in various departments. It shows the cash expected to flow into and out of the various functions for the coming season of operation. The cash budget helps ensure cash availability and determine whether internal financing can be achieved. It also aids management can take advantage of short-term portfolios and evaluate staff performance (Samuels, 2017).
Importance of Master Budget to the Human Resource Department
The human resource department is responsible for staffing, recruitment and performance appraisal. The function utilizes various components in their daily operations. For instance, they utilize the cash budget in appraising the managers. High amounts of cash inflows during a certain operational period depict good performance, and high outflows declare poor funds management is showing low performance and accountability (Chenhall, 2015). They are thus able to promote or demote based on the figures. They also use the direct labor budget when carrying out recruitment to add labor amounts for production. The direct labor budget shows the labor hours needed in production, and thus they can calculate the number and skill sets required.
Effects of Conflict between the Human Resource and Master Budget
In case of any inconsistencies between the human resource budget and the master budget, the human resource department is likely to either over staff or under staff. They are likely to miscalculate the labor time and thus bring the wrong number of workers to the company. Understaffing means the production target will not be met and overstaffing means the company will incur higher labor costs through an increased number of ghost workers. Also, in case of conflict between the two budgets, the human resource department will have difficulties appraising the employees. The cash figures disagreeing poses difficulty in determining employees worthy of a promotion and those deserving demotion. Poor decision making at this level may initiate morale issues on staff (Chenhall, 2015).
Chenhall, R. H., & Moers, F. (2015). The role of innovation in the evolution of management accounting and its integration into management control. Accounting, Organizations and Society, 47, 1-13.
Samuels, J. A., & Sawers, K. M. (2017). SRS Educational Supply Company: An Instructional Budget Project. Issues in Accounting Education, 32(4), 51-59.
Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2015). Financial & managerial accounting. John Wiley & Sons.