MASTER BUDGET IN ACCOUNTING 7
MasterBudget in Accounting
Organizationshave many kinds of budgets some budgets are prepared with aconsideration for the next five years, others consider the life of agiven project, while others are prepared with a consideration of justthe coming year. Budgets can be income oriented or cash oriented.Income oriented budgets focus on expenses and revenues on accrualbasis, while cash oriented budgets focus on the inflows and outflowsof cash. All these budgets are usually brought together in acompany’s master budget. In defining a master budget, a masterbudget refers to a final budget of an organization incorporatingoperating budgets and financing budgets of an organization themaster budget contains individual budgets for every unit of anorganization incorporated into one budget (Finkleret al, 2007).
Inaccounting, the master budget is a planning and control mechanismthat ensures the balancing of efficiency and effectiveness inplanning and forecasting the future plans of an organization. Themaster budget embraces both financing decisions and operatingdecisions. Operating decisions are combined in the operating budget,which covers the sales budget, ending inventory budget, productionbudget, and direct materials budget. On the other hand, financingdecisions are incorporated in the financial budget (Finkleret al, 2007). The constituents of the financial budget includecapital expenditure budget, the budgeted balance sheet and the cashbudget. The financial budgets focus chiefly on the cash resourcesrequired to fund projected operations and planned capitalexpenditures. Some of the elements of a master budget can bequalitative for instance, the long term plan of an entity maydiscuss general direction like movement towards becoming a tertiarycare giver. However, generally, the elements of a master budget mustbe quantitative and specific (Camillus,2006).
Inpreparing a master budget, managers follow a certain order. The chiefreason of following a specific order in the preparation of a masterbudget is because the components of a master budget have aninterconnection. This implies that the numbers in one component canbe used as the numbers in another component that follows the firstone. For instance, numbers in the sales budget are utilized inschedule of cash receipts. This is to mean that unless the salesbudget becomes prepared first, preparation of schedule of receiptsfrom customers may become a problem due to lack of information.Therefore, in the preparation of a master budget, components thatprecede one another must follow that order.
Astep by step procedure is necessary in preparing a master budget. Theinitial step comprises of adding up all fixed budget costs. Here, thebudgets to be included are advertising, benefit contributions,employee salaries, and supplies. The second step involves adding upall the flexible costs. Factory overhead, materials, and productioncosts are usually considered to belong to this category. The thirdstep entails calculating cushion. This amount should be at a minimumof 10% of the flexible totals. Step four entails combining all thefigures of flexible cost, fixed cost, and cushion in order to developa master budget for a business. The fifth and final step entailstrimming any components if need be. In case a master budget exceedsexpectations, or is beyond the ability of a business to make profit,it is necessary to trim some expenses of the business.
Amaster budget has two key characteristics in accounting. The firstcharacteristic entails the time horizon that the master budget wouldbe designed to cover. This is usually designed depending on thecharacteristics of an organization. One year is selected arbitrarystemming from the traditional emphasis of budgets. However, the timefor a master budget may vary depending on the actions and decisionsthat an organization considers taking (Kimmelet al, 2008). For example, in case an organization is consideringundertaking a certain project that is estimated to last for twoyears, the organization may choose to have a master budget for twoyears of the project. The other key characteristic is the scope andfocus of the content of the master budgeting system. The proposedsystem need to focus on action plans that match with the operationsof an organization. However, focus may also be on financialinstruments.
Theexact components of a master budget are dependent on the kind andsize of an organization or business (Bhattacharyya,2006). Nevertheless, all master budgets stand for the overallbusiness plan for a particular period budgeted for. The constituentsof a master budget form a detailed operation plan for an organizationfor the next period. A typical business has the following as thecommon constituents in a master budget operating budget, cashbudget, capital budget, budgeted financial statements, and flexiblebudget among other items.
Thereare different advantages and disadvantages associated with a masterbudget. One of the advantages of a master budget is that it givescompany executives and business owner an overview of anorganization’s budget. A master budget helps in revealing how muchan organization is spending and earning as a whole, indicatingwhether the organization has negative or positive financial standing.Through preparing a master budget, it is possible to get informationconcerning whether the organization is spending more that the amountprojected for, or whether an organization as a whole is spendingwithin the projected amounts. Another advantage of a master budget isthat it has the capacity of identifying problems and plans that areahead. For instance, a master budget can be utilized in revealing ifa certain unit of an organization spends beyond its limits, which maycause the organization to spend more resources than it is earning. Itis through the master budget that executives of an organization canbe in a position to look at budgets of individual departments of anorganization and repair spending issues that may emerge in a givendepartment. Besides, a master budget has an advantage in that ithelps in promoting coordination and communication with anorganization. Since a master budget shows the operating and financingdecisions of the entire organization, it is likely to promotecommunication and coordination within an organization. Where there isa master budget, employees and managers would be motivated. This isbecause employees and managers do not need to waste time thinkingwhat to do since a master budget would already have provided a guideon what to expect of employees and managers in terms of financing andoperating decisions.
Onthe other hand, one of the disadvantages of a master budget is thatit is difficult to update. It is difficult to update a master budgetdue to the many numbers and categories included in this budget.Because of the charts and extensive descriptions, a master budget mayalso be complicated to read and understand (Jane, n.d). Not everyonein an organization has the capacity of interpreting the informationpresented through charts and numbers in a master budget. This impliesthat the information presented on a master budget may be complicatedto employees of an organization, giving them a hard time to cope upwith the budgeting issues of an organization. Another disadvantage ofa master budget is that it requires a lot of time to prepare. Giventhat a master budget comprises of different budgets of a business,preparation of a master budget consumes a lot of time especially forlarge organizations, which have many departments. In addition,another disadvantage that is associated with the master budgetentails its lack of specifity (Jane, n.d). The amounts and numbers ona master budget indicate a collective sum of all the units’earnings and expenses this implies that it is difficult for a readerto understand the earnings and expenses of a certain department. Thisis because a master budget provides a sum of all the departmentsrather than individual departments.
Anexample of a master budget entails the following consider a firmthat wants to expand its operations within the next one year. Themaster budget of this firm would include incorporation of thedifferent financial and operating budgets.
Amaster budget emerges as a critical control tool to a businessbecause it helps in the planning of a business’ future intentions.It is with a master budget that a business can be in a position togauge the cost of its operation and whether the operations are worthengaging in or not. In case the costs of an organization are immense,it is possible for an organization to trim the costs which is verypossible through using a master budget.
Bhattacharyya,A. K. (2006). Principlesand practice of cost accounting.New-Delhi: Prentice-Hall of India.
Camillus,J. C. (2006). Strategicplanning and management control: Systems for survival and success.Lexington, Mass: Lexington Books.
Finkler,S. A., Ward, D. M., & Baker, J. J. (2007). Essentialsof cost accounting for health care organizations.Sudbury, Mass: Jones and Bartlett Publishers.
Jane,M. (n.d). The Advantages and Disadvantages of a Master Budget.Retrieved fromhttp://www.ehow.com/info_7796881_advantages-disadvantages-master-budget.html
Kimmel,P. D., Weygandt, J. J., & Kieso, D. E. (2008). Accounting:Tools for business decision making.Chichester: John Wiley.