The master budget presents the summary of various functional budgets. It is prepared by consolidating different budgets and helps project profit and loss accounts and budgeted balance sheets. The master budget is designed by the budget officer. It needs to be approved by the Budget Committee. The budget can be used for coordinating and controlling different functional departments.
It’s used to track expenses and income for an entire organization, and it combines budgets for individual departments or projects. The master budget remains static throughout the year, which allows the company to do variance analysis, comparing actual incomes and expenses against the company’s forecast.
Advantages of Master Budget
- A glance at all the functional budgets is made available in this budget.
- It acts as a reference point for all functional budgets.
- It helps in checking the accuracy of the operating budgets as it contains the summary of these budgets.
- Also, provide esta\imates about profits during the budgeted period.
- The master budget provides information related to the forecasted balance sheet.
- It sets targets for revenue, expenses, profits, and cash flows. This budget also acts as a control tool and helps in setting managerial targets.
Major parts of the Master Budget
- Operating Budget: It is related to the firm’s operating activities and includes the revenues generated and expenses incurred. This is presented in the form of the budgeted income statement representing the income-generating activities carried on within an organization.
- Financial Budget: It shows information about the financial position of the firm. It also represents the cash budget, which gives information about cash availability. The financial budget is prepared by making a budgeted balance sheet that uses the operating budget information.
It is a one-year planning document used as a tool for the management to identify its goals well in advance and channel the organization’s resources towards them. The master budget provides a rough guideline for the company’s near-term expectations. It should be noted that the budget should be prepared with the utmost caution as it affects the operational performance of the entire organization.