The master budget is a comprehensive summary of a business’ long and short-term goals. “It is a set of interrelated budgets that constitutes a plan of action for a specified time period” (Weygandt, Kimmel, & Kieso, 2008, p.4). It brings together long-range plans and short-term budgets. It provides calculated targets for sub-activities such as target sales, distribution, production, and finance. In addition it helps calculate any other item of financial interest to the business owner. The master budget shows how much a business is earning and spending and allows for an assessment of how good or bad the business is doing. Major inputs to the Master Budget
A master budget consists of two major components – the operating and financial budget. According to Horngren, Sundem, Stratton, Burgstahler, and Schatzberg (2008) “the operating budget focuses on the income statement and its supporting schedules or, in an organization with no sales revenues, on budgeted expenses and supporting schedules”. The operating budget is also known as the profit plan. “The financial budget focuses on the effects that the operating budget and other plans (such as capital budgets and repayments of debt) will have on cash balances” (p. 304). Why create a Master Budget?
Business owner creates master budget because it allows them to have an overview of their business operation in order to asses and point out areas of strength and areas that may required improvement. “What are its advantages and disadvantages?”
One of the advantages for creating a master budget is because it allows business owner with an overview of their business budget. It allows for a reevaluation of assess distribution and whether they are maximizing their performance, and when not, to make changes as needed. It also forces business manager to have a long range view of their business in line with their goals and objectives and not just the day-to-day operation. It allows for coordination among other...