A master budget includes all of the lower-level budgets within an organization, as well as cash flow forecasts, budgeted financial statements, and a financial plan. It gives a firm a broad overview of its finances and is often used as a central planning tool.
Learn more about how organizations use master budgets and what goes into building them.
What Is a Master Budget?
The master budget is a comprehensive financial planning document. It usually includes all of the lower-level budgets within the operating budget and the financial budget.
The operating budget shows the income-generating activities of the firm, including revenues and expenses. The result is a budgeted income statement.
The financial budget shows the inflows and outflows of cash and other elements of the firm's financial position. The inflows and outflows of cash come from the cash budget. As such, the result of the financial budget is the budgeted balance sheet.
Companies use financial budgeting to facilitate planning and control within a business firm so that they can manage the financial aspects of their business and plan for new product expansion in the future.
How a Master Budget Works
A strategic plan usually forms the basis for an organization's various budgets, which all come together in the master budget. It usually coincides with the fiscal year of the firm and can be broken down into quarters and further into months. If the firm plans for the master budget to roll from year to year, then it would usually add an extra month to the end of the budget to facilitate planning. It is called continuous budgeting.
The budget committee usually develops the master budget for each year, guided by the budget director, who is usually the controller of the company. They usually plan the operating budgets first since information from the operating budgets is needed for the financial budgets.
What a Master Budget Includes
These are the most often used elements within the master budget of companies. Some firms may not use one or another of the budgets, but most use some form of all of them. Service firms, for example, do not typically use production budgets.
The first schedule to develop is the sales budget, which is based on the sales forecast. The sales budget is not usually the same as the sales forecast but is adjusted based on managerial judgment and other data.
The second schedule for budget planning is the production schedule. The company must determine the number of sales the company expects to make in the next year. Then, it must budget how many sales in units it needs to make to meet the sales budget and meet-ending inventory requirements. Most companies have an ending inventory they want to meet every month or quarter so that they don't stock out.
Direct Materials, Labor, and Overhead Budget
The next schedules are the direct materials purchases budget, which refers to the raw materials the firm uses in its production process; the direct labor budget, which estimates how many hours of work and how many workers a company needs; and the overhead budget, which includes both fixed and variable overhead costs.
Finished Goods Inventory and Cost of Goods Sold Budget
The ending finished goods inventory budget is necessary to complete the cost of goods sold budget and the balance sheet. This budget assigns a value to every unit of product produced based on raw materials, direct labor, and overhead.
The selling and administrative expense budget deal with non-manufacturing costs such as freight or supplies.
The cash budget states cash inflows and outflows, expected borrowing, and expected investments, usually on a monthly basis. Any item that is not in cash, such as depreciation, is ignored by the cash budget.
Budgeted Balance Sheet
The budgeted balance sheet gives the ending balances of the asset, liability, and equity accounts if budgeting plans hold true during the budgeting time period.
The budget for capital expenditures contains budgetary figures for the large, expensive fixed assets for the business firm.
- A master budget is a comprehensive financial planning document that includes all of the lower-level budgets, cash flow forecasts, budgeted financial statements, and financial plans of an organization.
- It's usually developed by a firm's budget committee, guided by the budget director.
- A master budget usually incorporates many elements, which may include the sales, production, administrative, direct materials, labor, and overhead budgets.