Learning Materials For Accounting, Management , Finance And Economics.

Wednesday, April 4, 2012

Concept And Process Of Preparing Master Budget

Concept Of Master Budget

The master budget is prepared for a specific period and is static rather than flexible. Master budget is a comprehensive plan, a coordinated set of detailed financial statement of the operating plans and schedule for a short period, usually a year. It is the organization's formal plan of action for forth coming budget period. Master budget is a complete financial presentation of the operating plans of the entire company for the budgeted period. It presents all the information to the depth appropriate for the top management action. Master budget is a best media of understanding the company's micro economics relating to the forthcoming budget period. The schedule takes the shape of functional budgets. Master budget is a summary budget which incorporates all the functional budgets and it may taken the form of profit and loss account and balance sheet at the end of budget period. The master budget embraces both operating decisions and financial decisions. The operating divisions are incorporated in operating or functional budgets. Functional budgets are based for master budget. That is, preparation of master budget is not possible without preparing functional budgets.

Functional Budgets

* Sales Budget
* Production Budget
* Direct Material consumption Budget
* Material Purchase Budget
* Direct Labor Budget
* Factory Overhead Budget
* Cost Of Goods Sold Budget
* Selling Expenses Budget
* Administrative Expenses Budget

Financial Budget

* Capital Expenditure Budget
* Cash Budget
* Projected Income Statement
* Projected Balance Sheet

Process Of Preparing Master Budget

Some of the budget listed above can not be prepared until other budgets on the list are first prepare and completed. For example, the production budget in manufacturing company and the merchandise purchase budget in trading business cannot be prepared until the sales budget is available. As a result budgets within the master budget must be prepared in a definite sequence as follows:

1. Preparation Of Functional Budget:

a) Sales Budget
b) Production Budget
c) Direct Material Budget: Direct Material Uses Budget, Direct Material Purchase Budget
d) Direct Labor Budget
e) Factory Overhead Budget
f) Cost Of Production Budget
g) Cost Of Goods Sold Budget
h) Selling And Administrative Budget

2. Preparation Of Financial Budgets:

a) Budgeted Income Statement
b) Cash collection and distribution budget
c) Budgeted Balance Sheet