Master Budget:

Definition and Explanation:

The master budget is a summary of company's plans that sets specific targets for sales, production, distribution and financing activities. It generally culminates in a cash budget, abudgeted income statement, and a budgeted balance sheet. In short, this budget represents a comprehensive expression of management's plans for future and how these plans are to be accomplished. It usually consists of a number of separate but interdependent budgets. One budget may be necessary before the other can be initiated. More one budget estimate effects other budget estimates because the figures of one budget is usually used in the preparation of other budget. This is the reason why these budgets are called interdependent budgets.

Parts | Components and Preparation of a Master Budget:

Following are the major components or parts of master budget. Click on a budget link for detailed study.

1. Sales Budget 2. Production Budget 3. Material Budgeting | Direct Materials Budget 4. Labor Budget 5. Manufacturing Overhead Budget 6. Ending Finished Goods Inventory Budget 7. Cash Budget 8. Selling and Administrative Expense Budget 9. Purchases Budget for a Merchandising Firm 10. Budgeted Income Statement 11. Budgeted Balance Sheet
THE MASTER BUDGET INTERRELATIONSHIP Sales Budget

Ending Inventory Budget Direct Materials Budget

Production Budget

Direct Labor Budget

Overhead Budget

Cash Budget

Budgeted Income Statement

Budgeted Balance Sheet

Selling and Admn. Budget

Advantages and Disadvantages of a Master Budget:

Some advantages of a master budget are that it can give an idea of where a company wants to go and what it has to do in order to get there. It will also allow the company to realistically project future cash flows which in turn would help in getting certain types of financing. Some disadvantages of a master budget include the time involved in producing such a budget. This is primarily the reason a smaller company may not make a master budget if the company has a very small managerial staff.

HOW TO PREPARE A MASTER BUDGET

If you are in business you probably know all too well that preparing a master budget can be a daunting yet extremely important task. The master budget is a comprehensive planning document that incorporates several other individual budgets.

A master budget is usually classified into two individual budgets: the Operational budget and the Financial budget. The master budget is usually considered as the cornerstone of the entire budget. Each separate part consists of preparation for other budgets which we will discuss in this article. The operation budget consists of eight individual budgets:
y

Sales budget: The sales budget shows the expected sales in units at their expected selling prices. A business firm will prepare the sales budget for a given period of time based on the forecasted sales level, production capacity, and long and short term goals. The sales budget must be done first in the process of preparing the master budget because it must identify the expected sales level before it plans for any other activities.

Production Budget: A production budget is a plan for obtaining the needed resourced to carry out the manufacturing operations to meet the expected number of sales and maintain the desired inventory ending. The number of units produced is directly dependent on the sales level, units of finished goods ending and beginning inventory.

Direct Material Budget: The directed material budget will show the direct materials your business needs for production and the budgeted cost.

Direct Labor Budget: The production budget is needed to prepare a direct labor budget as well as the direct materials budget. It enables the personnel department to plan for new hires and repositioning employees. A good labor budget will help businesses avoid emergency hiring and will also help prevent labor shortages.

Factory Overhead Budget: Your factory overhead budget will include all the production costs except for the direct materials and direct labor budgets. Manufacturing costs will include costs that vary in direct proportion with the manufactured units as well as how the business carries out its operations.

Ending Inventory Budget

Selling and administrative expenses budget: The selling and administrative expenses budget is a plan for all non-manufacturing expenses. This particular budget gives you a guideline for selling and administrative activities during your budget period.

Budgeted income Statement: The last part of operational part of your master budget is the budgeted income statement. It estimates the expected operating income from budgeted operations. It also gives management a vision of the likely operating result upon completing the budgeted operation. Once this part is complete it will become the benchmark against which the budget is evaluated.

The second part of your master budget will include your financial budget. The financial budget consists of two individual budgets: y Cash Budget: Your cash budget will show the effects of all the budgeted activities on cash. By preparing a cash budget your business management will be able to ensure that they have sufficient cash on hand to carry out activities. It will also allow them enough time to

plan for any additional financing they might need during the budget period, and plan for investments of excess cash. A cash budget should include all items that affect the business cash flow and should also include three major sections; cash available, cash disbursements, and financing. y Budgeted Balance Sheet: The last step in preparing a master budget is the budget balance sheet. This is the sheet that will show the expected financial position at the end of the fiscal year or budget period. Understanding how to prepare a master budget is the most important thing a business can do in order to maximize its profits and get a good handle on their budget period. Reasons for Creating a Master Budget A budget provides managers with an opportunity to communicate quantitatively their financial strategy and expectations up to senior management and below to their subordinates (Homegren, Sundem, et al, 2008). Budgets also allow managers to receive feedback from subordinates regarding capabilities and opportunities (Homegren, Sundem, et al, 2008). The master budget expands this process to a corporate wide analysis, providing senior management with a very comprehensive view of the corporations short and long-term financial strategies, opportunities and potential challenges, to be avoided. What is the Master Budget The master budget is a one-year budget planning document for the firm encompassing all other budgets. It coincides with the fiscal year of the firm and may be broken down into quarters and, further, into months. If the firm plans for the master budget to be an ongoing document, rolling from year to year, then normally a month is added to the end of the budget to facilitate planning. This is called continuous budgeting. The budget committee usually develops the master budget for each year, guided by the Budget Director, who is usually the Controller of the company.

The Master Budget A. Comprehensive planning tool: The master budget is a comprehensive planning tool for an organizations operations during a specific time period (usually a year). It is based on a sales forecast of goods or services. B. Begins with sales forecast and considers many items: The master budget begins with a sales forecast. 1. Items considered in making a sales forecast include: a. past sales levels and trends; b. general economic conditions;

c. industry trends; d. Other facts affecting industry sales(e.g. technological change); e. political and legal events; f. company pricing policies; g. advertising and product promotions; h. actions of competitors; i. new products; j. market research studies;