Master Budget ppt

What is a Master Budget? How does it help in planning and control?

What is a Master Budget?

A Master Budget is a comprehensive financial planning document that combines all of an organization’s individual budgets into one overall plan. It includes both operating budgets (like sales, production, and expenses) and financial budgets (like cash, capital expenditure, and budgeted balance sheet). Master budget ppt

It serves as the overall financial plan for a specific period, usually a fiscal year.

How Does It Help in Planning and Control?

1. Planning:
   
   • Provides a clear roadmap of expected revenues, costs, and financial position.
   • Helps set targets and align all departments with organizational goals.
   • Assists in resource allocation and investment planning.
2. Control:
   
   • Acts as a benchmark for comparing actual performance with planned figures.
   • Helps identify variances and take corrective actions. Master budget ppt
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   • Promotes accountability across departments by assigning budget responsibilities.

Key Terms Involved in a Master Budget:

The master budget is made up of several individual budgets and components. The main terms involved include:

1. Operating Budgets:

These relate to the day-to-day activities of the business. Master budget ppt

• Sales Budget: Forecast of expected sales in units and revenue.
• Production Budget: Number of units to be produced based on sales forecasts.
• Direct Materials Budget: Raw materials required for production.
• Direct Labour Budget: Labour hours and costs needed.
• Overhead Budget: All production overheads (fixed and variable).
• Selling and Distribution Budget: Costs related to marketing, selling, and distribution.Master budget ppt
• Administrative Expenses Budget: Office and administrative costs.

2. Financial Budgets:

These deal with cash flow and financial position. Master budget ppt

• Cash Budget: Estimates cash inflows and outflows to manage liquidity.
• Capital Expenditure Budget: Planned spending on long-term assets.
• Budgeted Income Statement: Projected profit or loss.
• Budgeted Balance Sheet: Projected financial position at the end of the budget period.Master budget ppt

3. Supporting Schedules:

• Inventory Budget: Planning about raw material and finished goods are done for the purpose of inventory budget.
• Cost of Goods Sold (COGS) Budget: Expected cost of goods sold based on production and inventory.Master budget ppt

How can I create a master budget?

Creating a master budget involves compiling various individual budgets to form a comprehensive financial plan for an organization, usually over a fiscal year. Here’s a step-by-step guide:

1. Set Objectives and Assumptions

• Define sales targets, growth expectations, market conditions, etc.
• Decide on budgeting period (monthly, quarterly, annual). Master budget ppt

2. Prepare the Operating Budgets

These focus on the day-to-day operations:

• Sales Budget (first and most crucial)
  • Estimate units to be sold × selling price.
• Production Budget
  
  • Based on sales budget + desired ending inventory − beginning inventory.
• Direct Materials Budget
  
  • Quantity of materials needed × cost per unit.
• Direct Labor Budget
  
  • Labor hours required × wage rate.
• Overhead Budget
  
  • Fixed and variable overhead costs.
• Selling and Administrative Budget
  
  • Marketing, office expenses, admin salaries, etc.

3. Prepare the Financial Budgets

These focus on cash and financial position:

• Capital Expenditure Budget
  
  • Planned purchases of long-term assets.
• Cash Budget
  
  • Cash inflows and outflows; helps manage liquidity.
• Budgeted Income Statement
  
  • Projects net income using operating budgets.
• Budgeted Balance Sheet
  
  • Shows projected financial position.

4. Compile the Master Budget

• Combine all above budgets into a single, cohesive document.
• Usually includes a summary showing profitability and financial position.

These components work together to form the Master Budget, providing a complete financial overview for effective planning, coordination, and control.

Conclusion:
The master budget is a vital tool for both strategic planning and operational control. It ensures coordination among various departments and helps management make informed decisions to achieve financial stability and organizational success. You can check the syllabus of the cost Accounting on the official website of Gndu. Master budget ppt

Essential questions of cost Accounting

1. Explain. CVP analysis.
2. How to calculate per unit cost

Importance of Master Budget

The master budget is critically important for effective financial planning and management. Here’s why:

1. Comprehensive Financial Planning

It provides a complete picture of the company’s expected income, expenses, cash flow, and financial position. Master budget ppt

2. Goal Alignment

Helps align all departments and teams with the organization’s strategic objectives by setting clear targets.

3. Coordination Across Departments

Ensures different functional areas (sales, production, HR, etc.) are working in sync, avoiding conflicts or resource shortages.

4. Performance Evaluation

Acts as a benchmark for measuring actual performance and identifying variances for corrective action.

5. Resource Allocation

Helps in efficient allocation of resources—financial, human, and material—by forecasting needs and avoiding waste.

6. Risk Management

Anticipates potential financial shortfalls or bottlenecks, allowing preemptive action.

7. Decision-Making Support

Provides data-driven insights for short- and long-term business decisions.

Master budget ppt