Components and Steps in Developing of Master Budget - Essay Example

The first and foremost step in developing the master budget is the sales forecast in terms of quantities and values of products. After considering the opening and closing inventory levels, the production quantities are determined which is known as the production budget. The production budget is further divided into direct materials purchases and usage, direct labor, and factory overhead budgets. Likewise the indirect material and labor, other factory overheads, cost of manufacturing, cost of goods sold, ending inventory of finished goods, selling, administrative and operating expenses are budgeted.

Finally, the cash budget is prepared in which cash receipts and disbursements are determined. The process ends with the completion of the Pro Forma Income Statement, Pro Forma Statement of Cash flows, and Pro Forma Balance Sheet. Zero-based budgeting is a method of budgeting where all expenditures are justified and every department function is reviewed comprehensively rather than only gauging the increases. The reasons for adopting a zero-based budget are that it results in efficient allocation of resources, it helps detect inflating budgets, cost-effective ways to improve operations are determined, it increases staff motivation and provides an initiative for decision making, it is highly useful for departments where the output is not identifiable, it identifies outsourcing opportunities, removes wastage and outdated operations, communication and coordination within the organization becomes more efficient, and the task of cost centers and their relationship to the overall goals are identified.

Usually, a budget also contains non-financial information. This information is used to explain the financial information, qualify it, and divide the financial information into sub-information. Types of Non-Financial InformationInformation like the quality of the resources, the quantity of the resource required, the procedure for calculation, and the mechanism is generally included. In some cases, the workload on the employees and the human resources required to do the job is often included. This information is used in injunction with the financial details and helps to clarify the budget.

Non-Financial information is used commonly to calculate financial information. For example, the quality of a certain product can be divided into 4 classes and each class is allocated a weightage. The price of the product will be multiplied by the weighted average of the product to give the actual total price. Another example can be the quantity of wood required to manufacture 1000 units of chairs. This will be calculated by first finding the number of planks of wood a truck of trees gives.

Then the quality of the wood will be quantified to manufacture one unit of the chair and finally the total cost will be found. Thus non-financial information is usually necessary to calculate financial information. Advantages of Including Non-Financial Information in BudgetsThe benefit of using non-financial information in the budgets is that it makes the employees aware of the goals and objectives expected.