CP 6-4 Objectives of the master budget Domino\'s Pizza L.L.C. operates pizza del
ID: 2577357 • Letter: C
Question
Explanation / Answer
Simply stated, a budget is a projection of a firm’s future course of action in quantitative and/or financial terms.
A master budget is an integrated set of operating and financial budgets that project the activities of a firm for a future period. It serves as a planning, directing and control tool in the hands of the management. At the end of a period the actual results can be compared with the master budget and corrective actions can be taken.
Components of the Master Budget:
Master budgets are comprised of two major categories of supporting budgets called Operational budgets and Financial budgets.
The operational budgets are the plans for the functional departments. They are
1. Sales Budget in quantity and dollars, for the different products.
2. Production Budget covering all the product variants
3. Direct Material Purchases Budget in quantities and dollars
4. Direct Labor Budget with hours and cost
5. Overhead Budget for variable and fixed overheads
6. Selling and Administrative Expenses Budget, which can be subdivided into product wise/area wise sub budgets
7. Cost of Goods Manufactured Budget
The Financial Budget comprises the following sub-budgets:
1. Schedule of projected cash collections from receivables
2. Schedule of projected cash payments to suppliers
3. Schedule of cash disbursements for administrative and selling expenses
4. Cash Budget, subdivided into monthly budgets.
5. Budgeted Income Statement
6. Budgeted Balance Sheet
As can be seen, the component budgets cover all aspects of the functioning of a firm and culminate into the financial budgets, which yield the income statement and the balance sheet.
Budget preparation is done by involving the functional personnel, which aids in proper planning of the activities of each functional areas, so that the organizational goals are achieved.
The budgets so prepared can be used by the functional heads to direct the activities in their area. Budgets are an authorization to commit resources and help in implementation of the plans.
Continuous control over the activities can be exercised by breaking the annual budgets into monthly/ weekly budgets and then comparing the actuals with the budgets. Along with the preparation of the master budget, the formats for reporting and its periodicity can be laid out.
As Dominos operates delivery and carryout services it could introduce customer category wise cost budgets for selling expenses.
Thus, a master budget would aid in planning, directing and controlling the activities of a firm, and Dominos can use it to its advantage.