by Master Budget is a comprehensive budget that combines all the functional budgets prepared by different departments of an organisation. It provides an overall picture of the expected Sales, Production, Costs, Cash flows, profit, and Financial position for a specific period. It generally incorporates the Sales Budget, Production Budget, Materials Budget, Labour Budget, Overhead Budget, Cash Budget, and Capital Expenditure Budget. The Master Budget helps management coordinate departmental activities and ensure that individual plans are consistent with overall organisational objectives. It also provides a basis for comparing actual performance with budgeted performance. Thus, the Master Budget acts as an overall plan for planning, coordination, control, performance evaluation, and decision making.
Objectives of Master budget:
1. Overall Planning
The main objective of a Master Budget is to provide an overall plan for the organisation for a specific future period. It combines various functional budgets, such as sales, production, materials, labour, overhead, cash, and capital expenditure budgets. This helps management understand the expected level of business activities, income, expenditure, cash requirements, and profitability. The master budget converts organisational objectives into quantitative and financial targets. It provides a clear direction to different departments and helps them plan their activities according to common organisational goals. Thus, it acts as a comprehensive financial roadmap for management and supports systematic planning of the organisation’s future operations.
2. Co-ordination of Activities
An important objective of the Master Budget is to ensure proper coordination among different departments of an organisation. Sales, production, purchasing, finance, personnel, and other departments must work together to achieve common objectives. The master budget combines their individual budgets and establishes a relationship between their activities. For example, the production budget depends on expected sales, while the materials and labour budgets depend on production requirements. This interdependence requires proper coordination. By providing common targets and financial limits, the master budget reduces conflicts and duplication of activities. It ensures that departmental plans support the overall objectives and helps management achieve efficient and coordinated operations.
3. Profit Planning
The Master Budget helps management in profit planning by estimating future sales, costs, expenses, and expected profit. It combines information from various functional budgets to prepare an overall picture of the organisation’s expected financial performance. Management can estimate the level of sales required to achieve desired profits and identify areas where costs can be controlled. The budgeted income statement provides an estimate of future profitability and helps management compare alternative plans. If expected profits are unsatisfactory, corrective measures can be taken before the budget period begins. Therefore, the master budget supports systematic profit planning, cost management, revenue planning, and improvement of overall financial performance.
4. Effective Resource Utilisation
One of the objectives of the Master Budget is to ensure the optimum utilisation of resources. Every organisation has limited financial, material, labour, and production resources. The master budget estimates the requirements of different departments and helps management allocate resources according to organisational priorities. It prevents unnecessary expenditure, excessive inventory, idle capacity, and inefficient use of labour. The budget also helps determine the amount of cash required for various activities and ensures that funds are available when needed. By coordinating resource requirements with planned activities, the master budget promotes economical and efficient resource utilisation and helps the organisation achieve its objectives with minimum wastage and unnecessary costs.
5. Financial Control
The Master Budget provides an important basis for exercising financial control over business operations. It establishes predetermined targets for sales, production, costs, expenses, cash flows, and profits. During the budget period, actual results can be compared with these budgeted figures to identify variances. Management can analyse the reasons for favourable or unfavourable variances and take suitable corrective action. This process helps prevent unnecessary expenditure and ensures that departments operate within approved financial limits. The master budget therefore acts as a control tool for monitoring organisational performance. It enables management to identify deviations at an early stage and maintain better control over financial activities.
6. Performance Evaluation
The Master Budget provides a basis for evaluating the performance of departments and managers. It establishes clear financial and operational targets for different areas of the organisation. At the end of a budget period, actual performance can be compared with budgeted performance to identify variances. Management can determine whether sales targets were achieved, costs were controlled, resources were used efficiently, and expected profits were generated. Significant deviations can be investigated to identify their causes and responsibility. This helps management recognise efficient performance and take corrective measures where required. Thus, the master budget supports performance measurement, responsibility accounting, managerial evaluation, and accountability within the organisation.
7. Cash and Financial Planning
An important objective of the Master Budget is to help management plan its cash and financial requirements. The master budget incorporates the cash budget and information about expected receipts, payments, investments, borrowings, and capital expenditure. It enables management to estimate future cash surpluses or shortages and arrange funds accordingly. Proper financial planning helps avoid liquidity problems and ensures that sufficient cash is available for regular business operations. It also helps management decide when external finance may be required or when surplus funds can be invested. Therefore, the master budget supports cash management, financial stability, liquidity planning, and effective management of funds.
8. Decision Making
The Master Budget provides useful information for managerial decision making. It gives management an integrated view of expected sales, production, costs, cash flows, investments, and profitability. Based on this information, managers can make decisions regarding production levels, resource allocation, pricing, expenditure, borrowing, investment, and expansion. The master budget also helps management evaluate whether organisational plans are financially feasible. Alternative courses of action can be compared using estimated revenues and costs before actual resources are committed. Consequently, the master budget reduces uncertainty and provides a quantitative basis for important managerial decisions. It supports planning, forecasting, resource allocation, and strategic decision making.
Types and Entries of Master Budget:
1. Master Budget
A Master Budget is a comprehensive budget that combines all functional budgets of an organisation. It provides an overall estimate of sales, production, costs, cash flows, assets, liabilities, and profit for a specific period. It generally includes the Budgeted Income Statement, Cash Budget, and Budgeted Balance Sheet. The master budget helps management coordinate activities and evaluate overall performance.
Formula:
Budgeted Profit = Budgeted Sales Revenue − Budgeted Total Costs
Main Entries:
- Cash/Bank A/c Dr. → To Sales A/c
- Purchases A/c Dr. → To Cash/Bank or Creditors A/c
- Wages A/c Dr. → To Cash/Bank or Wages Payable A/c
- Expense A/c Dr. → To Cash/Bank A/c
2. Operating Master Budget
An Operating Master Budget focuses on the organisation’s planned operating activities and expected profitability. It combines budgets such as sales, production, materials, labour, overheads, and operating expenses. It ultimately helps prepare the Budgeted Income Statement. This type of master budget shows expected revenue, operating costs, and operating profit for the budget period. It is useful for planning and controlling day to day business activities.
Formula:
Operating Profit = Sales Revenue − Operating Costs
Main Entries:
- Cash/Bank A/c Dr. → To Sales A/c
- Production/WIP A/c Dr. → To Materials A/c
- Wages A/c Dr. → To Cash/Bank A/c
- Operating Expenses A/c Dr. → To Cash/Bank A/c
3. Financial Master Budget
A Financial Master Budget focuses on the organisation’s expected financial position and cash requirements. It incorporates the Cash Budget, Capital Expenditure Budget, and Budgeted Balance Sheet. It helps management estimate cash inflows, cash outflows, borrowing requirements, investments, assets, liabilities, and equity. This budget is useful for maintaining liquidity and planning the organisation’s financial structure.
Formula:
Closing Cash Balance = Opening Cash Balance + Cash Receipts − Cash Payments
Main Entries:
- Cash/Bank A/c Dr. → To Share Capital A/c
- Cash/Bank A/c Dr. → To Bank Loan A/c
- Machinery A/c Dr. → To Cash/Bank A/c
- Bank Loan A/c Dr. → To Cash/Bank A/c
