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. 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.

Steps in Preparing the Master Budget 1. Basic data 2. Operating budget 3. Financial budget

The principal steps in preparing the master budget: 1. Basic data a. Sales budget b. Cash collections from customers c. Purchases and cost-of-goods sold budget d. Cash disbursements for purchases e. Operating expense budget f. Cash disbursements for operating expenses

2. Operating Budget Prepare budgeted income statement using basic data in step

Financial Budget Prepare forecasted financial statements: a. Capital budget b. Cash budget c. Budgeted Balance sheet