Final answer:
The master budget is divided into the Operating Budget and the Financial Budget. The Operating Budget includes the planning of daily business functions, while the Financial Budget is concerned with the company's financial situation and projections.
Step-by-step explanation:
The master budget in a business context is comprised of various component budgets that come together to outline the overall financial plan and goals of an organization. The master budget is fundamentally divided into two main parts: the Operating Budget and the Financial Budget.
The Operating Budget encompasses the detailed plan for the day-to-day operations of the business for a specific period. This includes budgets such as the Sales Budget, Cost of Goods Sold Budget, Direct Materials Budget, Direct Labor Budget, Overhead Budget, and Selling and Administrative Expenses Budget.
The Financial Budget, on the other hand, deals with the business's financial position, including the Capital Expenditures Budget, the Cash Flow Budget, and the Balance Sheet Budget. It projects the inflow and outflow of cash and the overall financial health of the company.
Formula
The simplified budget formula given in the question, Budget = P₁ × Q₁ + P2 × Q₂, where P and Q represent the price and quantity of items, respectively, and Budget represents the available financial resources, helps to illustrate the basic relationship between costs of items and the total budget. The formula is useful when planning individual budgets within the master budget framework.