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Master Budget: 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. Parts | Components and Preparation of a Master Budget: Following are the major components or parts of master budget. Click on a budget link for detailed study.

1. Sales Budget 2. Production Budget 3. Material Budgeting | Direct Materials Budget 4. Labor Budget 5. Manufacturing Overhead Budget 6. Ending Finished Goods Inventory Budget 7. Cash Budget 8. Selling and Administrative Expense Budget 9. Purchases Budget for a Merchandising Firm 10. Budgeted Income Statement
11. Budgeted Balance She Sales Budget Ending Inventory Production Budget Budget Direct Materials Budget Cash Budget Direct Labor Budget Budgeted Balance Sheet Overhead Budget Selling and Admn. Budget

Budgeted Income Statement

Advantages and Disadvantages of a Master Budget: Some advantages of a master budget are that it can give an idea of where a company wants to go and what it has to do in order to get there. It will also allow the company to realistically project future cash flows which in turn would help in getting certain types of financing. Some disadvantages of a master budget include the time involved in producing such a budget. This is primarily the reason a smaller company may not make a master budget if the company has a very small managerial staff.

Definition Explanation and Concept of Zero Based Budgeting (ZBB) Method: Zero based budgeting (ZBB) is an alternative approach that is sometimes used particularly in government and not for profit sectors of the economy. Under zero based budgeting managers are required to justify all budgeted expenditures, not just changes in the budget from the previous year. The base line is zero rather than last year's budget. In traditional approach of budgeting, the managers start with last year's budget and add to it (or subtract from it) according to anticipated needs. This is an incremental approach to budgeting in which the previous year's budget is taken for granted as a baseline. This approach is called incremental budgeting. Zero based budgeting approach requires considerable documentation. In addition to all of the schedules in the usual master budget, the manager must prepare a series of decision packages in which all of the activities of the department are ranked according to their relative importance and the cost of each activity is identified. Higher level managers can then review the decision packages and cut back in those areas that appear to be less critical or whose costs do not appear to be justified. Zero based budgeting is a good idea. The only issue is the frequency with which a ZBB review is carried out. Under zero based budgeting (ZBB) ,the review is performed every year. Critics of such type of budgeting charge that properly executed zero based budgeting is too time consuming and too costly to justify on an annual basis. In addition, it is argued that annual reviews soon become mathematical and that the whole purpose of zero based budgeting is then lost. Whether or not a company should use annual reviews is a matter of judgment. In some situations, annual zero based reviews may be justified; in other situations they may not because of the time and cost involved. However, most managers would at least agree that on occasion zero based reviews can be very helpful. Advantages and Disadvantages of Zero Based Budgeting: Advantages | benefits of zero based budgeting process: 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. Efficient allocation of resources, as it is based on needs and benefits. Drives managers to find cost effective ways to improve operations. Detects inflated budgets. Municipal planning departments are exempt from this budgeting practice. Useful for service departments where the output is difficult to identify. Increases staff motivation by providing greater initiative and responsibility in decision-making. Increases communication and coordination within the organization. Identifies and eliminates wasteful and obsolete operations. Identifies opportunities for outsourcing. Forces cost centers to identify their mission and their relationship to overall goals.

Disadvantages | Limitations of zero based budgeting method. 1. 2. 3. 4. 5. Difficult to define decision units and decision packages, as it is time-consuming and exhaustive. Forced to justify every detail related to expenditure. The research and development (R&D) department is threatened whereas the production department benefits. Necessary to train managers. Zero based budgeting (ZBB) must be clearly understood by managers at various levels to be successfully implemented. Difficult to administer and communicate the budgeting because more managers are involved in the process. In a large organization, the volume of forms may be so large that no one person could read it all. Compressing the information down to a usable size might remove critically important details. Honesty of the managers must be reliable and uniform. Any manager that exaggerates skews the results.

Many companies use both static budgets and flexible budgets to complete their overall budget process. Static budgets require the company to set budget numbers at the beginning of the year. These numbers remain the same during the budget period. Flexible budgets offer varying numbers depending on the company's activity level. Flexible budgets offer several advantages to the companies who incorporate them into their process. Fixed Vs. Variable

The first step in creating a flexible budget involves classifying the fixed and variable expenses. Fixed expenses remain the same regardless of the activity level. Variable expenses increase as activity levels increase. Flexible budgets are usually designed using spreadsheet software due to the ease of incorporating formulas into the budget. The budget coordinator begins by creating a heading which includes the name of the company, the name of the report and the time frame for the report. She includes a cell where she indicates the activity level. Then she lists each of the expenses in the first column of the spreadsheet. She identifies each of the fixed expenses and enters the budget amount for each of these items. Then she looks at each of the variable expenses. For each variable expense, she determines the cost per unit. She enters a formula into each cell which takes the cost per unit times the amount referenced in the cell where she enters the activity level.

Uncertainty Analysis

Flexible budgets allow management to consider several scenarios when looking at a future time period. When the future activity level cannot be reasonably estimated, management can run the flexible budget for several activity levels. This allows management to create a best case and

worst case scenario to use for planning company resources. Management reasonably expects the actual numbers to fall in between these two scenarios. The flexible budget provides a range of total budget dollars. Improved Performance Evaluation

Companies use budgets to evaluate the performance of department managers. However, certain factors are often out of the manager's control. The primary factor out of the manager's control involves production levels. When customer demand increases, production levels must increase to accommodate. Increased production levels increase the expenses upon which the manager is evaluated. A flexible budget considers the impact of the additional production and adjusts the budget numbers accordingly. This allows the company to evaluate the manager's performance more fairly.

Useful Variance Analysis

When activity levels change, the variable manufacturing costs change as well. Variance analysis compares the actual cost to the budgeted cost. When budget numbers remain the same and the costs increase, the variance increases, too. A flexible budget considers cost increases

Budgets are estimates of the amount of money that a business or other organization takes in and puts out within a given period of time. Budgets are meant to allow managers to better plan for the business's future. However, while some budgets use precise, others include variables. Unlike static budgets, so-called "flexible" budgets allow for changes from various levels of activity in the business, such as shifts in sales volume. Advantageous in some cases, flexible budgets also have some downsides. Related Searches: Makes Prediction Difficult o Perhaps the main disadvantage of a flexible budget is that, by not allowing the manager to insert set figures, prediction is difficult. Instead of looking at an estimate of what to expect financially, the manager is left looking at a range of estimates. Because his decision-making may be different if the number is at one end of the range than if it's at the other, a flexible budget limits his ability to plan. Too Many Variables

When one variable in a flexible budget is subject to changes, other variables in the budget can also change, too. For example, if a flexible budget allows for changes in the volume of sales, then changes in sales will change the budget for related costs, such as upkeep of equipment and labor. So, even if there is only a single variable in a flexible budget, other items may be left opaque as well.

Can't Estimate Taxes

One of the main downsides to flexible budgets is that it makes the estimate of an organization's tax burden tough. Many organizations make estimated tax payments, in which they pay money to tax collecting agencies on a quarterly basis instead of at the end of the year, so as to avoid interest payments. Not being able to estimate how much the company will earn makes it extremely difficult to set aside an appropriate amount of tax money.


Because flexible budgets require the preparer to insert a range of estimates, the budget may be more complicated and take longer to prepare than a static budget. A static budget requires simple arithmetic, and a flexible budget requires algebra. In many cases, flexible budgets may not just take more time to put together, but be more difficult to understand.

Budgets help keep you on track financially if used properly. When you set up a budget, you can choose between the two main budget types -- flexible and static. Although most individuals and businesses use a flexible budget at some point, static budgets have notable benefits. In some circumstances, they are the better budget choice. Related Searches:

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Static Budget Defined o A static budget is a budget in which allotments do not change over the course of a budget period. It does not take changes in expenses or income into account. Even though a static budget doesn't change, like a flexible budget, static budgets may cover many different areas, such as utilities, rent or food. Ease of Planning

With a static budget, the numbers with which you work are constant. This can make it easy to plan and investigate financial options. For example, with a flexible budget, you may have $50 for entertainment one month and $75 the next. Under this method, you can't really tell what you'll be able to afford from one month to the next. With a static budget, you always know there is $50 for entertainment. This makes it easy to predict what you can do.

Visibility of Variances

Static budgets don't accommodate fluctuations in costs or revenue. Some consider this blindness to current markets as a limitation in static budgets, since your actual income and expenditures often vary from your budget projections. However, because static budget variances force you to be aware of where your budget was inaccurate, they let you easily monitor market trends. Over time, if you review the trends, you can make predictions about what may happen in the future and make the budget for the next static budget cycle more accurate.


With a flexible budget, you constantly have to reassess and come up with additional or new figures. With a static budget, this really isn't necessary. You may end up spending less time working on the budget.


Some experts such as Jerry J. Weygandt, Paul D. Kimmel and Donald E. Kieso propose that there really isn't a lot of difference between a static budget and a flexible budget. In their book, "Managerial Accounting: Tools for Business Decision Making," Weygandt, Kimmel and Kieso see flexible budgets as merely a chain of static budgets. In this sense, flexible and static budgets are connected, and despite the limitations of a static budget, you should see a static budget as a foundation for flexible methods.

What is a rolling budget? Sunday, December 12, 2010 at 4:40PM A rolling budget is a budget that is continually updated to add a new budget period as the most recent budget period is completed. A rolling budget calls for considerably more management attention than is the case when a company produces a one-year static budget, since some budgeting activities must now be repeated every month. In addition, if a company uses participative budgeting to create its budgets on a rolling basis, then the total employee time used over the course of a year is substantial. Consequently, it is best to adopt a leaner approach to a rolling budget, with fewer people involved in the process. Advantages and Disadvantages of the Rolling Budget This approach has the advantage of having someone constantly attend to the budget model and revise budget assumptions for the last incremental period of the budget. The downside of this approach is that it may not yield a budget that is more achievable than the traditional static budget, since the budget periods prior to the incremental month just added are not revised.

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