A master budget is a comprehensive financial plan that consolidates all of a company's individual budgets into a unified document, typically covering a fiscal year. It includes detailed projections of income, expenses, cash flows, and financial position, serving as a roadmap for the company's financial activities and strategic goals
Key Components of a Master Budget
1. Operating Budget (Planned Operating Budget)
- Sales Budget: Forecasts the number of units expected to be sold and the revenue generated from those sales.
- Production Budget: Plans the number of units to be produced based on sales forecasts and inventory policies.
- Manufacturing Budget: Includes costs related to production such as raw materials (direct materials budget), direct labor, and manufacturing overhead.
- Cost of Goods Sold Budget: Estimates the costs associated with the goods sold during the period.
- Operating Expenses Budget: Covers administrative expenses, selling costs (e.g., marketing, advertising), and other operational costs.
- Pro Forma Income Statement: A forecasted income statement combining expected revenues and expenses to show projected profitability
2. Financial Budget
- Cash Budget: Projects cash inflows and outflows, including operating cash flows, investments, and financing activities.
- Capital Expenditures Budget: Details planned investments in long-term assets such as property, plant, and equipment.
- Budgeted Balance Sheet: Shows the expected financial position at the end of the period, including assets, liabilities, and equity
3. Financing Budget
- Outlines how the company plans to raise funds to cover expenses and investments, including borrowing or equity financing if needed
Summary
The master budget integrates these components to provide a full picture of the company’s financial plans, enabling management to coordinate activities, allocate resources effectively, and evaluate performance through variance analysis. It is typically prepared with input from various departments but finalized by senior management
