Question

Please view this video and answer this question:

Managerial Accounting: Introduction to Budgeting (Links to an external site.)

Which master budget for a merchandising business replaces many of the manufacturing budgets?

Answer 1

Many of the calculations and budgets are the same for a merchandising company’s master budget and a manufacturing company’s master budget, but in some ways the master budget for a merchandising company is easier to complete. Merchandising companies purchase the products they sell rather than manufacture them. Therefore, the inventory, purchases, and cost of goods sold budget (a single budget) replaces five of the budgets needed for a manufacturing company: the production budget, direct materials budget, direct labor budget, manufacturing overhead budget, and cost of goods sold budget.

In a merchandising company, the production budget and the three manufacturing budgets—direct materials, direct labor, and manufacturing overhead—are replaced with the merchandise purchases budget.