The master budget

The master budget is the complete, coordinated plan for the period. It has two halves:

• Operating budgets — sales, production, materials, labour, overheads, cost of goods sold, selling and administration.
• Financial budgets — the cash budget, the capital expenditure budget, the budgeted income statement and the budgeted statement of financial position.

The budgeted income statement is prepared on the accrual basis, like published financial statements: revenue for mugs sold, cost of goods sold for those same mugs, and all overheads including depreciation. It is not the cash budget re-labelled.

The budgeted statement of financial position starts from the opening balances and rolls each one forward using the budgets: - Receivables: opening + credit sales − collections. - Inventories: closing quantities from the production and purchases budgets, at budgeted cost. - Property, plant and equipment: opening + capital spending − depreciation. - Payables: opening + purchases − payments. - Cash: the closing figure from the cash budget, including any financing. - Retained earnings: opening + budgeted profit − dividends.

If the budgeted statement doesn't balance, something in the chain is inconsistent — that check is one of the master budget's most useful features. Fernhill's mugs cost 6.00 each to make (clay 3.00, labour 2.20, variable overhead 0.80). Its 18,000 monthly fixed overheads (selling, administration and premises costs, including depreciation) are all treated as period costs — a marginal-costing budget. That is a legitimate choice for an internal budget, which no accounting standard governs. In IFRS financial statements, IAS 2 would require fixed production overheads (such as factory and kiln depreciation) to be absorbed into inventory, so reported profit could differ slightly where inventory levels change. The new kiln is commissioned at the end of March, so it adds no depreciation this quarter. A 20,000 bank loan is drawn on 31 March, as the cash budget showed was needed, so there is no interest this quarter; to keep the example focused, the budget ignores income tax.