Chapter 23, Problem 1STQ

To determine

Identify which of given statements are correctly describe relationships within the master budget.

Answer to Problem 1STQ

a. The production budgets are based in large part on the sales forecast.

b. In many elements of the master budget, the amounts budgeted for the upcoming quarter are reviewed and subdivided into monthly budget figures.

c. The operating budgets affect the budgeted income statement, the cash budget, and the budgeted balance sheet.

Explanation of Solution

Master budget:

Master budget is an interrelated budget that collectively summarizes all the planned activities of the business. Master budget is not a single document and it consist the number of interrelated budgets like sales budget, production budget, and cash budget. The element of master budget would vary based on the size and nature of the business.

Master budget helps the management to review the upcoming quarter budget with the monthly amount of budget figures.

The sales forecast is the starting point in the preparation of a master budget. When the level of sales has been forecast, the production budget is prepared based on the manufacturing cost and operating expense incurred during the year.

Financial budgets are prepared based on the operating budgets, and when there are changes in the operating budget, it would directly affect the financial budgets (budgeted income statement, balance sheet, and cash flow statement.

Option “d” is not a correct answer as per above explanation, only option “a, b and c” are the correct answer as per above explanation. Hence, the correct options are a, b, and c.

Conclusion

Therefore, the correct options are,

a. The production budgets are based in large part on the sales forecast.

b. In many elements of the master budget, the amounts budgeted for the upcoming quarter are reviewed and subdivided into monthly budget figures.

c. The operating budgets affect the budgeted income statement, the cash budget, and the budgeted balance sheet.