The production budget is based on the sales budget, and once the sales budget has been prepared and ending inventory objectives determined, the production budget is relatively easy to prepare.
There is no such thing as an "expense budget." General and administrative expenses are budgeted as part of the operating budget, and they are based upon management's plans for the coming year. Selling expenses are also a part of the operating budget, and they are based on the sales budget.
The sales budget is usually the first budget to be prepared, and it influences all other budgets in the master budget. The volume of sales and level of sales revenue are difficult to forecast, as many external factors can influence this budget. The sales budget is based on a number of assumptions about the changing environment such as competitors' activities, consumer tastes and demand, prices, the general economy, government regulations, and many other factors that are outside the control of the company. Therefore, the sales budget is very difficult to develop.
The preparation of the manufacturing overhead budget is fairly straight-forward after the production budget has been prepared, because it is based on the production budget.
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