Concept of Master Budget

Concept of Master Budget

The master budget is a one-year budget planning document for the firm encompassing all other budgets. This budget is prepared for a specific period and is static rather than flexible. It is the aggregation of all lower-level budgets produced by a company’s various functional areas, and also includes budgeted financial statements, a cash forecast, and a financing plan. It can be made for a month, a quarter or for the whole year. It all depends on the management’s working style and decision-making process. This budget is a comprehensive plan, a coordinated set of detailed financial statement of the operating plans and schedule for a short period, usually a year. It is the organization’s formal plan of action for the forthcoming budget period. It includes all other financial budgets as wells as a budgeted income statement and balance sheet. A master budget is a complete financial presentation of the operating plans of the entire company for the budgeted period. It presents all the information to the depth appropriate for the top management action.

However, the following factors shall be considered;

  • Inventory at the beginning of the year
  • Inventory to be maintained at the end of the year
  • Number of units manufactured
  • Buffer stock to be maintained throughout the year.

A master budget is the best media of understanding the company’s microeconomics relating to the forthcoming budget period. It is the sum of all individual budgets which is made by the various functional departments within a company. The schedule takes the shape of functional budgets. This budget is a summary budget which incorporates all the functional budgets and it may take the form of profit and loss account and balance sheet at the end of the budget period. The master budget embraces both operating decisions and financial decisions. At the end of each period, actual results can be compared with the master budget and necessary control actions can be taken. The operating divisions are incorporated in operating or functional budgets. Functional budgets are based on a master budget. That is, the preparation of the master budget is not possible without preparing functional budgets.

Functional Budgets

  • Sales Budget
  • Production Budget
  • Direct Material consumption Budget
  • Material Purchase Budget
  • Direct Labor Budget
  • Factory Overhead Budget
  • Cost Of Goods Sold Budget
  • Selling Expenses Budget
  • Administrative Expenses Budget

Financial Budget

  • Capital Expenditure Budget
  • Cash Budget
  • Projected Income Statement
  • Projected Balance Sheet

 

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