Master Budget

Topics: Budget, Income statement, Cash flow Pages: 5 (1426 words) Published: December 7, 2012
Master Budget

Master Budget Definition
The master budget is the aggregation of all lower-level budgets produced by a company's various functional areas, and also includes budgeted financial statements, a cash forecast, and a financing plan. The master budget is typically presented in either a monthly or quarterly format, and usually covers a company's entire fiscal year. An explanatory text may be included with the master budget, which explains the company's strategic direction, how the master budget will assist in accomplishing specific goals, and the management actions needed to achieve the budget. A master budget is the central planning tool that a management team uses to direct the activities of a corporation, as well as to judge the performance of its various responsibility centers. It is customary for the senior management team to review a number of iterations of the master budget and incorporate modifications until it arrives at a budget that allocates funds to achieve the desired results. Hopefully, a company uses participative budgeting to arrive at this final budget, but it may also be imposed on the organization by senior management, with little input from other employees. 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. Read more at

The budgets that roll up into the master budget include:
* Direct labor budget
* Direct materials budget
* Ending finished goods budget
* Manufacturing overhead budget
* Production budget
* Sales budget
* Selling and administrative expense budget
The selling and administrative expense budget may be further subdivided into budgets for individual departments, such as the accounting, engineering, facilities, and marketing departments. Once the master budget has been finalized, the accounting staff may enter it into the company's accounting software, so that the software can issue reports comparing budgeted and actual results. Smaller organizations usually construct their master budgets using electronic spreadsheets. However, spreadsheets may contain formula errors, and also have a difficult time constructing a budgeted balance sheet. Larger organizations use budget-specific software, which does not have these two problems. Example of the Master Budget

Many lower-level budgets have specific formats that are used to arrive at certain outcomes, such as the fully absorbed cost of the finished goods inventory, or the number of units of products to be manufactured. This is not the case for the master budget, which looks very much like a standard set of financial statements. The income statement and balance sheet will be in the normal format mandated by Generally Accepted Accounting Principles or International Financial Reporting Standards. The primary difference is the cash budget, which does not usually appear in the standard format of the statement of cash flows. Instead, it serves the more practical purpose of identifying specific cash inflows and outflows that will result from the rest of the budget model. Here is an example of the cash budget: Alpha Intergalactic Corporation

Cash Budget
For the Year Ended December 31, 20XX
 | Quarter 1| Quarter 2| Quarter 3| Quarter 4|...
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