Next we're going to talk about the different types of budgets that an organization can use. Essentially, we'll explore this master plan, or master budget. Things usually start off by understanding the sales that will take place during a given time period and so we'll need to start with a Sales Budget. The Sales Budget information then flows into and determines what are Production Budget needs to look like. In other words, what units do we need to produce during this particular time period? The Production Budget then informs a series of component budgets. Those would be the different sources of costs. If we are a manufacturing organization, we would see a Materials Budget. Regardless of what type of organization we are, manufacturing or service, we'll also usually see a Labor Budget. And then of course, other indirect costs are categorized in the Overhead Budget. Sales Budget also informs the Selling and Administrative Budget, these are costs that are generated by the sales activity inside of our organization as opposed to the producing activity. Collectively all of these component budgets aggregate into a budgeted income statement, essentially a pro forma or projected income statement for the period in which we're budgeting. Now let's talk about each of these individual budgets. The Sales Budget is essentially an estimate of sales revenue. It's specific to a given time period, whether again that is monthly, quarterly, or annual. Sales Budget can vary in terms of how detailed the information provided is. Of course we can adopt a very aggregate view of organization or a significant business unit or division within it but the Sales Budget can also be broken down into the individual components, perhaps based on the different types of products that are produced and sold, as well as other organizational aspects such as teams, departments or divisions. Next comes the Production Budget. The Production Budget like the sales budget it is time specific. But instead of talking about units sold we're talking about units produced during that time period. The Production Budget as I mentioned before is driven by the information on the sales budget. We first understand how many units we will sell And then that informs how many units we need to produce. The essence of the Production Budget is organized around the timing of that production, as well as the different flows of inventory throughout our organization, especially for a manufacturing firm. Now the production budget informs individual Component Budgets. Those include the different sources of costs of producing our product. In a manufacturing firm, those would include materials, labor, overhead, which eventually become our cost of goods sold as reflected on the income statement. If we're a service oriented firm, then the focus would likely be on labor and overhead. And the other odd component budget is the selling and administrative costs. These might have to do with advertising, selling costs, distribution, customer service, etc. And finally we have the Budgeted Income Statement. This ultimately represents the outcome of that master plan reflected in all the individual budgets. It's an aggregate of the sales, production, and component budgets and it represents a pro forma or projected income statement for the accounting period at hand. It's a projected outcome which helps facilitate planning and resource allocation. It also gives us a goal to shoot for, guiding our decisions in the organization throughout the accounting period.