A master budget is a set of interconnected budgets of sales, production costs, purchases, incomes, etc. and it also includes pro forma financial statements. A budget is a plan of future financial transactions. A master budget serves as planning and control tool to the management since they can plan the business activities during the period on the basis of master budget. At the end of each period, actual results can be compared with the master budget and necessary control actions can be taken.
Components of Master Budget
Master budget has two major sections which are the operational budget and the financial budget. They have following components:
- Sales Budget
- Production Budget
- Direct Material Purchases Budget
- Direct Labor Budget
- Overhead Budget
- Selling and Administrative Expenses Budget
- Cost of Goods Manufactured Budget
- Schedule of Expected Cash Receipts from Customers
- Schedule of Expected Cash Payments to Suppliers
- Cash Budget
- Budgeted Income Statement
- Budgeted Balance Sheet
Note that all of the above component budgets may not be included in the master budget of every business. Some of these such as production budget and cost of goods manufactured budget are not need by a non-manufacturing business.
Order of components of master budget
As we said earlier, the components of master budget are interconnected, which means that numbers from one component budget flow to another one. For example sales budget numbers are used in schedule of cash receipts from customers and unless the sales budget is prepared we are unable to prepare schedule of receipts from customers because of lack of information. This means that components of master budget must be prepared in a specific order. We have ordered the above list in such a way that the necessary information needed by any component budget is provided by a preceding component.
Written by Irfanullah Jan