A master budget is a comprehensive financial plan that outlines the overall financial goals and objectives of an organization for a specific period, typically one year. It serves as a blueprint for the organization's operations and provides a framework for coordinating and managing various individual budgets within the organization.
The master budget integrates several individual budgets, such as the sales budget, production budget, direct materials budget, direct labor budget, manufacturing overhead budget, selling and administrative expense budget, and cash budget, among others. Each of these budgets focuses on a specific aspect of the organization's operations and contributes to the overall financial plan.
The process of creating a master budget typically starts with the sales budget, which estimates the anticipated sales volume and revenue for the budget period. The sales budget is then used as the basis to develop other budgets. For example, the production budget determines the number of units to be produced based on the projected sales volume and desired ending inventory levels.
The master budget also includes the budgeted income statement, budgeted balance sheet, and cash flow statement. These financial statements provide a comprehensive overview of the organization's projected financial performance, financial position, and cash flows during the budget period.
The master budget serves multiple purposes, including:
- Planning: It helps in setting financial goals and objectives, as well as determining the resources needed to achieve them. It allows the organization to anticipate and plan for future financial requirements.
- Coordination: The master budget facilitates coordination among different departments within the organization. It ensures that the various budgets are aligned and consistent with the overall financial plan.
- Performance evaluation: By comparing actual results to the budgeted amounts, the master budget helps in evaluating the organization's performance. It enables management to identify any deviations, analyze the reasons behind them, and take corrective actions if necessary.
- Communication: The master budget serves as a communication tool, conveying the organization's financial plans and expectations to stakeholders, such as investors, lenders, and employees. It provides a clear picture of the organization's financial health and future prospects.
Overall, the master budget is a crucial tool for financial planning and control. It helps organizations allocate resources effectively, monitor performance, and make informed decisions to achieve their financial objectives.
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