Introduction
A master budget is a standard tool for outlining crucial financial information that overviews the entirety of a company’s actions. It is typically created on an annual basis, used to guide a firm’s financial activities, and ensures that it stays on track to meet its financial goals (Warren et al., 2019). Comprehension and application of this concept are critical proficiencies in accounting, as this tool enables managers to identify objectives, estimate revenues, and allocate resources correctly.
Master Budget Components
A master budget is separated into different parts to reveal a firm’s path ahead and create a solid foundation for its activities. This set is further separated into several statements that are divided into operating and financial budgets (Warren et al., 2019). For example, the first category includes a sales budget that outlines the possible revenue from projected sales and a production budget that specifies the number of goods necessary to be manufactured. Other parts are a direct materials budget that outlines the expected materials costs, a direct labor budget that shows the expected labor costs, and an overhead budget that includes all the other costs associated with running the business.
Financial budgets are also vital in such a document, as they reveal any balance changes related to a company’s activities. A budgeted balance sheet shows the expected financial position of a firm at the end of the period, while a cash budget highlights the expected cash inflows and outflows during that time. A master budget can include a budgeted income statement that shows the possible outcome of planned activities (Warren et al., 2019). While these are the most common components of a master budget, there may be other parts depending on the specific needs of the business.
Preparing a Master Budget
A master budget is typically prepared by first creating a sales forecast, which forms the basis for the budget. From the sales forecast, a production budget can be created, which outlines the number of goods that must be manufactured to match the expectations from the first sheet (Warren et al., 2019). A direct materials budget, direct labor budget, and manufacturing overhead budget stem from the output of a previous statement. Finally, all of these budgets are combined to create the master budget.
Advantages of a Master Budget
A master budget is a tool that both prevents losses and enhances revenues. By creating such a statement, a firm can reduce its resource and time waste, enable managers to track a company’s progress toward specific objectives, and protect long-term business strategies from deviations (Ali, 2021). Other advantages of a master budget include improved decision-making, enhanced control and coordination of the business, as well as increased accountability and financial stability.
Flexible Budgets
A flexible budget is derived from a master budget, but it is adjusted to reflect a business’s actual level of activity. While a master budget provides a useful starting point for planning and decision-making, it may not reflect a business’s actual performance correctly (Ali, 2021). Such an overarching plan is based on assumptions regarding future activities, which may not always be accurate. In contrast, a flexible budget can be adjusted to reflect a business’s current performance, making it a more helpful tool for planning and decision-making (Adilli, 2020). By comparing this type of statement with real-time performance indicators, a firm can identify variances and take appropriate corrective action. This approach can help organizations improve their resource management and increase their overall performance and productivity.
Conclusion
In conclusion, a master budget allows companies to assess their financial situation adequately, allocate resources, and outline concrete objectives. It consists of several categories that focus on a specific business operation and complement each other. When done correctly, a master budget provides a stable foundation for the selected period, although it might be necessary to adjust expectations based on a firm’s actual performance. A flexible budget can assist with this task by taking any variations into account.
References
Adilli, A. (2020). The flexible budget as a development tool: Evidence from the personal preparation course. SSRN Electronic Journal, 8. Web.
Ali, B. M. (2021). Organization budgetary control system. SSRN Electronic Journal. Web.
Warren, C. S., Jones, J. P., & Tayler, W. B. (2019). Financial and managerial accounting (15th ed.). Cengage.