Master budget

A master budget (in other words comprehensive budget) is an integrated package of budgets resulting from budgeting process conducted in a company. It is set for a specified period, most frequently a year .

Regarding the terminology, master in the term master budget means that it is a wide, extensive and complex set covering the entire organization's budgets .

The main idea behind it is to combine all individual (functional) budgets of each division, department or responsibility centre into one general document for the whole company, indicating its plans for the upcoming period .

Components of a master budget

The master budget consists of two major parts, namely :

• Operating budget, which takes into account budgeted income statement and related budget schedules (ranging from research and development to administrative costs budgets).
• Financial budget, which is based on capital budget, cash budget, budgeted balance sheet and budgeted statement of cash flow.

An operating budget focuses on operating (day-to-day) activities and covers expenses incurred and revenues earned, while a financial budget provides information about cash condition, showing cash inflows and outflows.

Mastering the master budget

The process of preparing every single master budget starts with creating an operating budget. Shall we take a manufacturing company as an example, the operating budget is usually structured in the following way:

1. Sales (revenue) budget
2. Production budget
3. Direct materials purchases budget
4. Direct labour cost budget
5. Manufacturing overhead cost budget
6. Cost of goods sold budget
7. Selling and administrative expenses budget
8. Budgeted income statement

As soon as the budgeted income statement is done, it is time to proceed with the budgeted balance sheet which, based on capital and cash budget, is a part of financial budget. Subsequently, a cash flow statement can be prepared .

Therefore, a master budget is nothing else than a consolidated budgeted income statement, a budgeted balance sheet and a budgeted statement of cash flow .

Although a vast majority of master budgets consist of the elements stated above, it is worth mentioning that there is some flexibility while establishing a comprehensive budget. As organizations create different types of budgets following their needs, depending also on the size of the business, there is no one obligatory scheme of a master budget. Every company can decide on which sub-budgets to include and which layout or format to choose. In the end, the main aim of the document is to help management and provide it with crucial information .

A company's document which provides detailed instructions on how to prepare budgets is called a budget manual .

The importance of communication and coordination

As already indicated, a master budget is a summary of all the company's budgets. Only after the approval of a comprehensive budget, the functional budgets (sub-budgets) can be redistributed and spread down through the hierarchy in order to convert the plans into actions. The responsibility centres are in charge of implementing them in an organization. Taking this into consideration, a master budget becomes a helpful planning tool for facilitating communication between all employees .

In contrast to rather very specific and detailed functional budgets that focus on various activities within an enterprise separately, the master budget appears to be a real coordinator of the entire system. More precisely, its task is not only to integrate all of the sub-budgets so as to ensure goal-congruence and harmony between departments, but also to avoid any situation that may pose risks such as shortage of resources (raw materials, stock, finished products) or excess inventory .

The final version of a master budget usually results from additional amendments and corrections. That is why coordination between different value chain's functions is so essential during the process of budgeting. The implementation of master budgets constitutes a good starting point for further analyses (e.g. variance analysis) and is directly linked to the continuous improvement of an organization's performance .

Examples of Master budget

• The most common example of a master budget is the cash budget. This budget includes all the cash inflows and outflows for a given period of time. This type of budget helps the company to forecast their cash position in the near future and plan accordingly.
• An operating budget is another type of master budget. This budget shows the projected income and expenses for a specific period of time. It includes items such as sales, cost of goods sold, expenses, capital expenditures and depreciation.
• A capital budget is also a type of master budget. This budget is used to plan for investments in long-term projects such as plant and equipment purchases. It also includes financing for these purchases and repayment of any debt.
• A personnel budget is another type of master budget. This budget is used to plan for personnel expenses such as wages, salaries, benefits and other personnel costs. It also includes any projected training or recruitment costs.

Advantages of Master budget

A master budget has several advantages, which makes it popular among many companies. These advantages are:

• It enables an organization to have a better control over its financial resources. It helps the company to plan and forecast its financial requirements, and also helps them to monitor the progress of their budgeting process.
• It helps the company to identify and allocate resources to the activities which are critical for the success of the business.
• It also helps the company to identify and analyze any potential risks and opportunities.
• It helps the company to identify any areas of waste or inefficiency, and take corrective action to eliminate them.
• It helps the company to create a framework for future budgeting decisions and helps them to develop strategies that will ensure their financial success.

Limitations of Master budget

A master budget is a comprehensive set of budgets that are created to plan a company's operations for a specified period of time. However, there are certain limitations that come with a master budget. These limitations include:

• Rigidity: A master budget is typically set up with a plan of action that is set in stone. There is little room or flexibility to adjust to changing market conditions or unforeseen events.
• Time-Consuming: Creating a master budget can be quite time consuming, as it involves collecting and analyzing data, setting goals, and creating multiple budgets.
• Limited Usefulness: A master budget is only useful for the period of time it was created for. Once that period is over, the budget becomes obsolete, and must be recreated for the next period.
• Unpredictability: A master budget can be difficult to create with accuracy, as the future can be difficult to predict. It can be hard to account for potential risks and opportunities that may arise in the future.
• Reliance on Other Budgets: A master budget is only as useful as the individual budgets that it is composed of. If individual budgets are not accurate or properly developed, the master budget will not be able to provide useful information.

Other approaches related to Master budget

The following are some other approaches related to Master budget:

• Operating Budget - a budget that outlines a company’s expenses and income for a period of time, usually a month, quarter, or year. It helps to manage the company’s cashflow and forecast future revenues.
• Capital Budget - a budget that identifies and evaluates the costs associated with investments in long-term projects such as new equipment, property, and software.
• Cash Flow Budget - a budget that estimates the amount of money that a company will receive and spend over a specified period of time. It helps a company plan for their cash needs and manage their expenses.
• Project Budget - a budget that outlines the costs associated with a specific project or initiative. It includes all of the costs that are necessary to complete the project, such as labour, materials, and overhead.

In summary, a Master budget is a comprehensive budget that includes all of the different budgeting approaches outlined above. It is used to plan and manage a company’s finances over a period of time.

Footnotes

Master budget — recommended articles

Functional budget — Budgetary control — Bottom up budgeting — Cash control — Resource plan — Fixed budget — Operating cycle — Cost element — Budget manual

References

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• Vanderbeck E. J. (2012), Principles of Cost Accounting, South-Western Cengage Learning, Mason, pp. 349-366
• Warren C.S., Reeve J.M., Duchac J. (2008), Financial & Managerial Accounting, South-Western Cengage Learning, Mason, p. 963
• Weygandt J.J., Kimmel P.D., Kieso D.E. (2009), Managerial Accounting: Tools for Business Decision Making, John Wiley & Sons, New York, pp. 392-393

Author: Paulina Zachara