Master Budget
Master Budget
A master budget is a comprehensive financial plan that consolidates all individual departmental budgets into a single, unified document for an organization. It serves as a central planning tool that outlines the company's expected revenues, expenses, and financial position over a specified period, typically covering one fiscal year.
The master budget includes both operating budgets and financial budgets, providing a holistic view of the organization's financial activities.
Operating Budgets: These budgets detail the income-generating activities of the company and include:
- Sales Budget: Projects future sales based on historical data and market analysis.
- Production Budget: Estimates the number of units to be produced to meet sales demands.
- Direct Materials Budget: Calculates the raw materials required for production.
- Direct Labor Budget: Estimates labor costs associated with production.
- Manufacturing Overhead Budget: Projects overhead costs related to manufacturing operations.
- Selling and Administrative Expense Budget: Details costs related to selling products and managing the business
Financial Budgets: These budgets focus on the overall financial health of the organization and include:
- Cash Budget: Forecasts cash inflows and outflows to ensure sufficient liquidity for operations.
- Budgeted Income Statement: Projects revenues and expenses to estimate net income.
- Budgeted Balance Sheet: Provides an overview of expected assets, liabilities, and equity at the end of the budgeting period.
Purpose of a Master Budget
The primary purpose of a master budget is to provide management with a comprehensive framework for planning, controlling, and evaluating organizational performance. It helps in:
- Aligning departmental goals with overall corporate strategy by ensuring that all departments work towards common objectives.
- Facilitating communication among different departments through collaborative input during the budgeting process.
- Monitoring actual performance against budgeted figures through variance analysis, which allows management to identify areas needing corrective action.