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
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)