Master Budget:
Learning Objective of
the Article:
- Define and explain the term "master
budget".
- What are the parts / components of
master budget?
- What are its advantages and
disadvantages? Give example of 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, a
budgeted
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.
-
Sales Budget
-
Production Budget
-
Material Budgeting | Direct Materials Budget
-
Labor Budget
-
Manufacturing Overhead Budget
-
Ending Finished Goods Inventory Budget
-
Cash Budget
-
Selling and Administrative Expense Budget
-
Purchases Budget for a Merchandising Firm
-
Budgeted Income Statement
-
Budgeted
Balance Sheet
THE MASTER
BUDGET INTERRELATIONSHIP
|
Sales
Budget |
|
↓
↓
↓
↓
↓ |
|
↓ |
|
↓
↓
↓
↓
↓ |
|
Ending Inventory Budget |
→
← |
Production Budget |
|
|
↓
|
↓ |
↓ |
|
Direct Materials 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.
Example of Master Budget:
Click here for example of a master budget.
(This is an external link)
|
