Which of the following represents the correct order in which most master budgets are prepared?

• A. Direct materials budget, production budget, sales budget, cash budget
• B. Sales budget, production budget, direct materials budget, cash budget
• C. Production budget, sales budget, direct materials budget, cash budget
• D. Cash budget, sales budget, production budget, direct materials budget

Answer: (B)

Verified step by step guidance

1. Understand the concept of a master budget: A master budget is a comprehensive financial planning document that includes various individual budgets, such as sales, production, and cash budgets, to coordinate all aspects of an organization's operations.
2. Recognize the logical sequence of budget preparation: The order of budgets is determined by the flow of information and dependencies between them. For example, the sales budget provides the foundation for the production budget, which in turn informs the direct materials budget.
3. Step 1: Start with the sales budget. This budget forecasts the expected sales volume and revenue, which is the starting point for all other budgets.
4. Step 2: Prepare the production budget. Based on the sales budget, the production budget determines the number of units that need to be produced to meet sales demand and maintain inventory levels.
5. Step 3: Develop the direct materials budget. Using the production budget, calculate the quantity and cost of raw materials required for production. Finally, prepare the cash budget to ensure sufficient liquidity for operations and expenses.