Martin’s Management Accounting Textbook: Chapter 9

As the F&O Business Office began the budget process for 2001, management decided to build a Web-based, or intranet, budget and planning system. The new system allowed managers to use the Web to input budget information directly, thus eliminating the need to upload initial budgets and subsequent budget changes. Understanding the master budget and its components is a critical step in building a budgeting process that aligns strategy master budget schedules with planning and resource allocation.

Example: Master Budgets for Different Businesses

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 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. Since the difference is caused by the way fixed overhead costs are treated, it can be illustrated by comparing standardfixed overhead costs with budgeted fixed overhead costs. Figure 9-1 shows that if planned or budgeted hours (BH1) are less than denominator hours (DH), theplanned production volume variance (PPVV) is unfavorable and represents underapplied fixed overhead.

The Master Budget: Comprehensive Guide for Managerial Accounting

The sales budget is usually different from the sales forecast and is adjusted based on managerial judgment and other data. This captures general operating expenses not tied directly to production. Leaving enough time to gather data, analyze past spending, and account for variables will result in the most accurate master budget. The management group at Jerry’s Ice Cream is reconvening to discuss sales growth anticipated for the next budget period. Retained earnings at the end of last year totaled $56,180, and no cash dividends are anticipated for the budget period ending December 31.

#1. Budget for Sales

The master budget is a comprehensive financial planning document that consolidates various individual budgets within an organization. It serves as a blueprint for the organization’s financial activities, guiding decision-making and performance evaluation. D See Figure 9.5 “Direct Materials Purchases Budget for Jerry’s Ice Cream” for the direct materials purchases budget. Past experience indicates that 80% of thecredit sales are collected during the month of sale, 18% are collected in the following month, and 2% are uncollectible.

• Overhead is applied on the basis of direct labor hours.
• (See Responsibility Accounting,Exhibit 9-6 and the Chapter 9 Supplement).
• The CapEx budget is a plan for significant investments in long-term assets, such as new equipment, property upgrades, or technology systems.
• A diagram illustrating the various parts of a master budget is presented in Exhibit 9-4.
• You need the schedule of expected inflows from clients and outflows to suppliers to calculate the net cash position of the firm.
• In addition to producing revenue, all of thesecompanies generate three types of costs including discretionary, engineered and committed costs.

Allocate Resources and Costs

Because most departments’ plans are linked to QuickBooks ProAdvisor sales, it is the starting point in the budgeting process. Because most departments’ plans are linked to sales, it is the starting point in the budgeting process. Here, the company has to make the budget to decide who to keep and who to let go of for the betterment of the business.

Who Prepares the Master Budget?

The behavioral literature on budgetingsupports the view that the budget should reflect what is most likely to occur under efficient operating conditions. If a budget is to be used as an effectiveplanning and monitoring device, it should encourage a high gross vs net level of performance and efficiency, but at the same time, it should be fair and obtainable. If thebudget is viewed by managers as unfair, (too optimistic) it may intimidate rather than motivate. One way to gain acceptance is referred to as participative(rather than imposed) budgeting. The idea is to include all levels of management in the budget preparation process. Of course this process must be coordinated bya budget director to ensure that a fair budget is obtained that will help achieve the goals of the total organization.

How to Create a Master Budget for Your Company

The cash budget estimates the timing and amount of cash inflows and outflows over the budgeting period. FP&A professionals use the cash budget to plan for the cash needed to cover operating costs and other payments. They also use it to estimate how much cash the company expects to receive during the period. 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. A master budget is a comprehensive financial plan that outlines a company’s projected income and expenses for a specific period, usually a year.

The cash budget presented in Figure 9.11 “Cash Budget for Jerry’s Ice Cream” shows that Jerry’s will not need to borrow cash in any of the four quarters. In fact, Jerry’s Ice Cream will have a hefty reserve of cash totaling $155,576 at the end of the fourth quarter. The following illustrations include a partial master budget for March including the various parts of the operating budget, a cash budget andan abbreviated balance sheet. Budgets for February and April can also be prepared with the given data. However, a budget for January would require unitsales for December.

Cash Budget

Next, you have to work on the budget for financial income and expenses. Here, you should consider interest expenses or debt repayments. Prioritize projects based on strategic importance, return on investment, and available resources.

#6. Budget for Cash

Whether you ask in-house accountants to spend their time measuring variances or hiring external financial analysts, strictly enforcing your master budget can consume significant resources. Because the master budget is a large-scale strategic document, reviewing it while keeping any changes in the company’s position and strategy in mind can be more beneficial than constant itemized comparison. This is a significant difference from some of the individual spending budgets, such as the manufacturing budget or the purchases budget, where itemized tracking may assist you in avoiding overspending. If you’ve been in business for a while, you can use the previous year’s totals to guide you through the financial projections required to create the financial budget. If you’re just starting, all of the figures in your operational and financial budgets will be estimates.