A master budget is a document that integrates all the individual budgets prepared by the different departments within a company. It helps to coordinate the activities of the sales, purchasing, production, and other divisions, and provides top management with a tool to monitor the company’s progress and take corrective action if required.
What does master budget mean?
Each department in a company has its own set of goals. The sales department attempts to maximize the number of units sold. The purchasing department’s primary objective is to ensure that it buys goods and services of the desired quality at the lowest possible price. The production department’s focus is to increase output by making the best possible use of the machinery and equipment at its disposal.
Each unit within a company strives to meet the goals that have been set for it. While this is desirable, the top management’s main concern is that the entire organization should work together to meet the firm’s business targets. A master budget helps the senior management to achieve this end.
This budget is prepared on a yearly basis and is usually reviewed every month. A detailed and comprehensive analysis could be carried out on a quarterly basis. The master budget provides details of the company’s production targets, its sales volumes, and its costs. In fact, every aspect of the business is reflected in this document.
The main point to remember about a master budget is that it consolidates all the activities of the company into a single document. It provides a vital link between production, sales, and costs and helps to ensure that the different parts of the company work together in a coordinated manner.
Example of a master budget
Bill Green, an accountant at Walden Corporation, is given the task of preparing the company’s master budget. He begins the exercise by collecting data and individual budgets from the various divisions within the company. This involves calling for the following documents:
⇨ Sales budget
⇨ Manufacturing budget
⇨ Data about costs and administration overheads
⇨ Purchasing department’s estimates
Bill also gets hold of the projected cash flow statements and the budgeted income statement and budgeted balance sheet of the company.
He compiles all these into a single document and verifies that the data is consistent. For example, he ensures that the company’s opening stock of finished goods + budgeted production during the year – estimated closing stock of finished goods is equal to the projected sales. He carries out a similar exercise for all the data presented by the various divisions.
When he is satisfied that the information in the master budget is correct, he presents it to his CFO.
A master budget integrates the budgets prepared by the different departments in the company.