Question

Describing master budget components

Sarah Edwards, division manager for Pillows Plus, is speaking to the controller, Diana Rothman, about the budgeting process. Sarah states, “I’m not an accountant, so can you explain the three main parts of the master budget to me and tell me their purpose?” Answer Sarah’s question.

Short answer

Answer

The three main parts of the master budget are the operating budget, capital expenditure budget, and financial budget.

Step-by-step solution

Meaning of master budget

The master budget is the collection of various budgets and budgeted financial statements.

Three main parts of the master budget and their purpose

Following are the three main parts of the master budget

1. The operating budget: The set of budgets that projects sales revenue, cost of goods sold, and selling and administrative expenses, all of which feed into the cash budget and then the budgeted financial statements.

2. The capital expenditure budget: The budget that presents the company’s plan for purchasing property, plant, equipment, and other long-term assets.

3. The financial budget: The budget includes the cash budget and the budgeted financial statements.