Comprehensive /Master budget

08/04/2020 0 By indiafreenotes

The Master Budget is consolidated summary of the various functional budgets. It has been defined as “a summary of the budget schedules in capsule form made for the purpose of presenting, in one report, the highlights of the budget forecast”.

The definition of this budget given by the Chartered Institute of Management Accountant, England, is as follows:

“The summary budget incorporating its component functional budgets and which is finally approved adopted and employed”.

The master budget is prepared by the budget committee on the basis of co-ordinated functional budgets and becomes the target for the company during the budget period when it is finally approved by the committee.

This budget summarises functional budgets to produce a Budgeted Profit and Loss Account and a Budgeted Balance Sheet as at the end of the budget period as is clear from the form given as follows:

Advantages of the Master Budget:

Following are the main advantages of the master budget:

(1) A summary of all functional budgets in capsule form is available in one report.

(2) The accuracy of all the functional budgets is checked because the summarised information of all functional budgets should agree with the information given in the master budget.

(3) It gives an overall estimated profit position of the organisation for the budget period.

(4) Information relating to forecast balance sheet is available in the master budget.

This budget is very useful the top management because it is usually interested in the summarised meaningful information provided by this budget.

Some of the components of the master budget are briefly explained as follows:

1. Materials and utilities budget:

This budget provides for acquiring raw materials required for production, spare parts for maintenance, labour time, machine time, and energy consumption and so on.

The labour time and machine time is usually related to what a unit of time is budgeted to yield. In other words it relates to the output per unit of time.

2. Control of liquidity:

This budget involves cash flow and is very important in controlling cash and meeting current financial obligations. The budget forecasts cash receipts and outlays for a given period of time and are necessary to control the income and expenses so that there is no shortage of cash to pay for bills and also there in no excessive unused cash which may be unproductive.

3. Revenue and expense budgets:

The revenue budgets should show anticipated sales by product or by geographical territory or by department and so on. In anticipating sales, managers must take into account their competitors, planned advertising expenditures, sales force effectiveness and other relevant factors.

The expense budgets list the primary activities undertaken by a unit to achieve its goals and the costs associated with these activities. These budgets cover all necessary and relevant areas including rent, utilities, supplies, security and so on.

4. Capital expenditure budgets:

These budgets plan for long term investments and include expenditures for new plants and equipment, major installations, replacement of existing equipment, renovation of buildings and so on. These are typically substantial expenditures both in terms of magnitude and duration.

Capital budgeting is a part of long range planning and must be broken into well defined phases of the program known as milestones each phase being budgeted for cost, time and effort in self contained way.

5. Sales budgets:

A sales budget is the direct outcome of sales forecast and is based on the consideration of demand and supply situation, competition, past sales trends, future prediction of sales, seasonal changes that affect sales and so on.

The sales forecasting is based upon such factors as population trends, general economic environment, consumer’s purchasing power, disposable income, price trends of the products, inflation rate and so an.

6. Production budget:

The production budget contains the plan for future manufacturing operations and is based upon the sales forecasts and sales budgets. It aims at obtaining utilization of manufacturing methods and facilities. The budget may be prepared in two parts, one being the production volume budget and the other being the budget for cost of manufacturing.

The production volume budget relates to the production of physical units and involves production planning. The cost of production budget deals with all costs attributable to the manufacture of the product.

7. Balance Sheet:

A balance sheet is composite budget and reflects anticipated assets, liabilities and owner’s equity or net worth at the end of a given period in the future. It provides a forecast of the anticipated financial status of the company at a future date.

All these budgets should be carefully set and should be flexible enough so that any reasonable changes in the values of various variables can be accommodated.