The starting point in developing the master budget is the preparation of the cash budget sales budget production budget budgeted income statement
The correct answer and explanation is:
The correct answer is sales budget.
Explanation:
The starting point in developing the master budget is the preparation of the sales budget because it serves as the foundation for all other components of the master budget. A master budget is a comprehensive financial plan that includes a series of interconnected budgets, which collectively outline the company’s financial goals for a specific period. These budgets depend on sales projections since sales drive production, expenses, and cash flows.
Why Start with the Sales Budget?
- Sales as the Driver of Operations: The sales budget estimates the expected revenue from sales during the budgeting period. Since sales are the primary source of income for most organizations, they determine the level of production and the resources needed to meet demand.
- Influences on Other Budgets:
- Production Budget: The sales budget determines how much needs to be produced to meet sales demand while accounting for inventory changes.
- Direct Materials, Labor, and Overhead Budgets: These budgets rely on production levels derived from the sales budget.
- Cash Budget: Sales forecasts influence expected cash collections, which are vital for cash flow planning.
- Budgeted Income Statement and Balance Sheet: These statements incorporate revenue, expenses, and profits, all starting with sales projections.
- Planning Accuracy: By starting with the sales budget, organizations can create realistic and coordinated plans across departments, avoiding resource mismatches or inefficiencies.
Conclusion:
In summary, the sales budget is the starting point of the master budget because it establishes the foundation for other budgets. It ensures that production, spending, and financial planning align with revenue expectations, making it the logical first step in the budgeting process.