A master budget is a series of interrelated budgets.

There are two major components of master

budget. These are operational and financial budget.
Preparing master budget starts from operational budget, consisting of sales budget, production
budget, Cost of Goods Sold budget, Selling and Administrative Budget and Budgeted Income
Statement. It all starts from sales budget, which is considered to be the foundation of entire operating
budget. It answer the question, “How many units are expected to sell”. It needs marketing forecast of
sales which could either be in the form of formal or informal techniques. We can predict sales using
economic indicators or through management’s judgment and intuition.
Next on the line is the production budget. Since we know how many units are expected to sell, we can
now able to determine the number of units needed to be produced in order to meet the sales target.
Simultaneous to this, the company must also decide how much do they want to have in their ending
inventory to have buffer stock, in order to be included in the production budget. Under this budget
are three other direct materials purchases, direct labor, and overhead budget. From the word itself, it
showcases how many direct materials needed, how much direct labor hours are required to produce
the needed number of units. Overhead budget corresponds to the cost needed other than prime cost.
After production, ending finished goods inventory are expected and thus has its own budget, which
could now be used as basis for the Cost of Goods Sold budget. COGS budget ,in other words, needs
expected production, sales volume, and inventory policy to be projected.
Together with the production budget, selling and administrative expenses budget are constructed
which depends heavily on sales budget. This budget composes of CEO Salary, sales commission, etc.
which needs information about how much are sold to be computed. At this point onwards, we can
now prepare for budgeted income statement, with all the revenue and expenses indicated.
The next component are the financial budget consisting of both cash budget and budgeted balance
sheet. Cash budget answer the questions, “What are our cash needs?”, “Do we have to do any
borrowings to meet the former?” Cash budget, in addition to the aforementioned budgets above, also
consider capital budget from long-term sales forecast. Budgeted Balance Sheet followed by budgeted
statement of cash flows which both incorporates all budgeted cash receipts and disbursements,are
prepared as the last process.