Master budget

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Master budget
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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 [1].

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 [2].

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 [3].

Components of a master budget

The master budget consists of two major parts, namely [4]:

  • 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 [5].

Therefore, a master budget is nothing else than a consolidated budgeted income statement, a budgeted balance sheet and a budgeted statement of cash flow [6].

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 [7].

A company's document which provides detailed instructions on how to prepare budgets is called a budget manual [8].

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 [9].

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 [10].

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 [11].


  1. Jawahar L. 2002, p.807
  2. Bhimani A., Horngren C.T., Datar S.M., Rajan M. 2015, pp.425-439
  3. Livingstone J.L., Grossman T. 2001, pp.182-183
  4. Bhimani A., Horngren C.T., Datar S.M., Rajan M. 2015, pp.425-439
  5. Warren C.S., Reeve J.M., Duchac J. 2008, p.963
  6. Dyson J.R. 2007, p.335
  7. Finkler S.A., Ward D.M., Baker J.J. 2007, pp.163-164
  8. Bhimani A., Horngren C.T., Datar S.M., Rajan M. 2015, pp.425-439
  9. Drury C. 2005, p. 274
  10. Jawahar L. 2002, p.807
  11. Bhimani A., Horngren C.T., Datar S.M., Rajan M. 2015, pp.425-439


Author: Paulina Zachara