The usual starting point for a master budget is:

The usual starting point for a master budget is:

A) the budgeted income statement.

B) the sales forecast or sales budget.

C) the production budget.

D) the direct materials purchase budget.

Answer. B) the sales forecast or sales budget.

In the process of general budgeting, the sales forecast or sales budget is the most vital step in the development of the master budget. This forecast defines the targeted quantity of product/service sales and its revenue for the next period, given the internal and external conditions from the market analysis and the company’s past experience, the macroeconomic factors, and the management’s intentions. Once established, the sales budget drives all other operational budgets: The amounts of a production budget vary with the anticipated sales volume, while direct material costs are determined by production requirements, and labour and overheads are assigned with respect to production budgets and selling and administrative expenses are estimated in correspondence with the level of sales. Gross fixed capital and cash budgets are among the plans that use expected sales figures in planning the finance of the business. Therefore, the sales budget can be considered as the basic line item that defines the master budget.