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MEMBER NAME:
JAWARIA ASIF IQBAL (14053)
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ANUM UROOJ (13986)

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SAHAR RAZZAQ (12688)

PROGRAM: MBA 3
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COURSE: COST AND MANAGERIAL ACCOUNTING

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ASSIGNMENT SUBMITTED TO: MISS NOSHEEN

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Master Budget Definition:

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 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. There may also be a discussion of the
headcount changes that are required 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

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participative budgeting to arrive at this final budget, but it may also be imposed on the

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organization by senior management, with little input from other employees.

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The budgets that roll up into the master budget include:

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·0 Direct labor budget
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·1 Direct materials budget

·2 Ending finished goods budget

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·3 Manufacturing overhead budget

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·4 Production budget

·5 Sales budget
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·6 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
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departments.
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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 financial reports
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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.

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 Example:
A good example of long term planning is a merger or acquisition of another company.
Management must look at what the company can gain by purchasing another company
and what resources would be redundant. For instance, every company has a group of
employees in charge of the administrative duties within the company. If a company was
purchased, there would no need to keep two sets of administrative staff. The management
of the acquiring company would have to make a decision who should be let go.

Management can also use the master budget for expansion planning. For instance, a
machine shop should consider current cash flows, current loan rates, current debt limits,
and future expected sales before management plans a large expansion. The master budget
includes detailed budgets with all of this information.

Master Budget Problems:

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When a company implements a master budget, there is a strong tendency for senior

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management to force the organization to closely adhere to it by including budget goals in
employee compensation plans. Doing so has the following effects:

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·7 When compiling the budget, employees tend to estimate low sales and high
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expenses, so that they can easily meet the budget and achieve their compensation
plans.
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·8 Forcing the organization to follow the budget requires a group of financial

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analysts who track down and report on variances from the plan. This adds
unnecessary overhead expense to the business.

·9 Managers tend to ignore new business opportunities, because all resources are
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already allocated toward attaining the budget, and their personal incentives are
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tied to the budget.

Thus, enforcing a master budget can skew the operational performance of a business.
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Because of this problem, it may be better to employ the master budget as just a rough
guideline for management's near-term expectations for the business.
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Production budget Definition:

A production budget is a financial plan that lists the number of units to be manufactured
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during a period. In other words, this is a report that estimates the number of units that a
plant will produce from period to period.

What Does Production Budget Mean?

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 Managers use the production budget to estimate how many units they will need to
produce in future periods based on the future estimated sales numbers. They also use this
report as a planning tool for future production processes, machine times, and scheduling.
Production managers have to estimate the future demands and plan out the workflow to
make sure everything is produced timely and there aren’t long periods of wait time or
down time.

This is the main reason why the production budget does not show the costs of production
nor the sales revenue from the estimated sales during the period. Instead, it always shows
the total estimated sales in units and the budgeted number of units produced. Remember,
this is a report used to determine the number of units that need to be produced during the
period. The sales budget and manufacturing budget are used to estimate the total revenues
and expenses for the period.

Example:

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The standard production budget compares three periods of activity. These periods could

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be years, months, or even weeks depending on what the managers need to forecast their

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plans. The report uses a simple equation to calculate the units to be produced during the
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First, it takes the next period’s budgeted sales units and multiplies them by the ratio of
inventory to future sales. This gives us the budgeted ending inventory in units. We can
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then add the budgeted sales units for the current period and subtract out the beginning
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inventory leaving the number of units that will need to be produced based on the
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estimated sales numbers and desired ending inventory balance.

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