MASTERBUDGET

School: University of Massachusetts, Amherst - Course: PSYCHOLOGY 280 - Subject: Accounting

What is a Master Budget? The master budget is the aggregation of all lower-levelbudgetsproduced by a company's various functional areas, and also includes budgetedfinancial statements, a cash forecast, and a financing plan. The master budget is typically presented in either a monthly or quarterly format, and usually covers a company's entirefiscal year. An explanatory text may be included with the master budget, which explains the company's strategic direction, how the master budget will assist in accomplishing specific goals, and the management actions needed to achieve the budget. There may also be a discussion of the headcount changes that are required to achieve the budget. A master budget is the central planning tool that a management team uses to direct the activities of acorporation, as well as to judge the performance of its variousresponsibility centers. It is customary for the senior management team to review a number of iterations of the master budget and incorporate modifications until it arrives at a budget that allocates funds to achieve the desired results. Hopefully, a company usesparticipative budgetingto arrive at this final budget, but it may also be imposed on the organization by senior management, with little input from other employees. The budgets that roll up into the master budget include: Direct labor budget Direct materials budget Ending finished goods budget Manufacturing overhead budget Production budget Sales budget Selling and administrative expense budget

The selling and administrative expense budget may be further subdivided into budgets for individual departments, such as the accounting, engineering, facilities, and marketing departments. Once the master budget has been finalized, the accounting staff may enter it into the company's accounting software, so that the software can issue financial reports comparing budgeted and actual results. Smaller organizations usually construct their master budgets using electronic spreadsheets. However, spreadsheets may contain formula errors, and also have a difficult time constructing a budgeted balance sheet. Larger organizations use budget-specific software, which does not have these two problems. Example of a Master Budget Many lower-level budgets have specific formats that are used to arrive at certain outcomes, such as the fullyabsorbed costof thefinished goods inventory, or the number of units of products to be manufactured. This is not the case for the master budget, which looks very much like a standard set of financial statements. Theincome statementandbalance sheetwill be in the normal format mandated byGenerally Accepted Accounting Principlesor International Financial Reporting Standards. The primary difference is the cash budget, which does not usually appear in the standard format of the statement of cash flows. Instead, it serves the more practical purpose of identifying specific cash inflows and outflows that will result from the rest of the budget model. Here is an example of the cash budget: Alpha Intergalactic Corporation Cash Budget For the Year Ended December 31, 20XX