Question

Why is the sales budget considered the cornerstone of the master budget and why is it so important?

Answer 1

The Cornerstone of the budgeting process is the sales budget because the usefulness of the entire operating budget depends on it. The sales budget involves estimating or forecasting how much demand exists for a company’s goods and then determining if a realistic, attainable profit can be achieved based on this demand.

There are two techniques for sales forcasting:
1). Formal technique involves use of statistical tools which includes use of economic indicators like gross national product, per capital income etc.
2). Informal technique involves intuition and judgement. In this management modifies sales projections using formal techniques based on other changes in the environment. In other words, companies do not use any formal techniques. Instead, sales managers and salespersons estimate how much they can sell. Managers then add up the estimates to arrive at total estimated sales for the period.

First the sales budget is prepared in units and then in dollars by multiplying the units by their selling price. The sales budget in units is the basis of the remaining budgets that support the operating budget means based on the sales units, production budget is made and shows how much production is required for those sales and after that purchase budget is made which shows how much raw material is required to be purchased for the production of budgeted units. There is a heirarchy hence the sales budget is first and considered the cornerstone of master budget.