Master budget is the aggregation of the various lower-level budgets of a company. The master budget includes the budgets of the various functional areas of the company, as well as other budgeted financial statements, forecast of the cash inflows and outflows and a financial plan. It usually covers the entire fiscal year of the company, but is presented either in a monthly or quarterly format. It is the strategic plan of the future of the company.
The planning and controlling of various factors of production can be done with regard to the master plan and the performance of the company can then be compared at the end of the year by looking at the master budget and corrective actions can thus be taken.
There are basically two components of the budgets which are further divided into other parts. The two main components are:
- Operational Budget
- Financial budget
The operational or the operating budget basically comprises of seven other budget planning schedules. The first one to be prepared here is the sales budget which will be determined by the sales forecast. These two may not be exactly same as the sales forecast will be determined by the judgement of the management.
The next thing to be covered is the production schedule, based on the sales budget it will be decided how much production will take place. Next will be the direct materials purchase budget, to buy the raw materials. Also, there is the direct labour budget and the overhead budget (including the fixed as well as variable overhead costs to be incurred). Then the selling and administrative expenses budget and finally the cost of goods manufactured budget will be included in the operational budget.
The financial budget of the company has five components. This budget shows the inflows and outflows of the cash and the other elements which can be considered a part of the firm’s financial position. The components of the financial budget are:
- Schedule of expected cash receipts from the customers
- Schedule of expected cash payments to suppliers
- Cash Budget
- Budgeted Income Statement
- Budgeted balance sheet
Though all these elements are covered in the master budget of any company but some elements may be left out, for example a services firm need not include the production budgets.
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