The budget that is prepared first of all is:

Question

Accepted Answer

The correct option is 3:
The budget that must be prepared first is the **Budget for the key factors**, also widely known as the Principal Budget Factor or Limiting Factor. This is a foundational concept in budgetary control. The key factor is the element that restricts the company's output or sales for the budget period, such as sales demand, raw material supply, or plant capacity. Since no other functional budget (like production, sales, or purchases) can be realistically prepared until the limit on the primary resource or activity is established, the management must first budget for this constraint. Once the key factor's limitation is quantified, it sets the maximum feasible scale of operations, which is then used as the base for constructing all other interdependent budgets.

The incorrect option is 1:
The **Cash budget** is a financial budget that details the expected cash receipts and disbursements over a period. It is essentially a summary budget that depends on the successful completion of several operating budgets. For example, the cash from sales, cash for raw material purchases, and cash for operating expenses must first be estimated in their respective functional budgets before the overall cash position can be forecast in the cash budget. Therefore, it is prepared much later in the budgeting process, consolidating the figures from the operating budgets.

The incorrect option is 2:
The **Master budget** is the comprehensive, summary budget of all the individual functional and financial budgets of the company. It represents the final plan of action for the business for a specific period and typically includes the budgeted income statement and budgeted balance sheet. Since it is the consolidation of all sub-budgets, including the sales budget, production budget, and cash budget, it cannot be the one prepared first. It represents the final synthesis of the entire budgeting cycle.

The incorrect option is 4:
An **Expenditure budget**, such as a production cost budget, a material purchase budget, or an administrative overhead budget, is a functional budget that outlines the expected costs for a period. These budgets are prepared *after* the level of activity has been set. For instance, you cannot calculate the material expenditure required until you know the number of units to be produced, which, in turn, is dictated by the maximum capacity derived from the key factor budget. Thus, all expenditure budgets are subsequent steps that follow the identification and budgeting of the limiting factor.