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 budget is a plan of future financial transactions. A master budget serves as a 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.
Components of Master Budget –
The master budget has two major sections which are the operational budget and the financial budget. They have the following components:
Operational Budget –
- Sales Budget,
- Production Budget,
- Direct Material Purchases Budget,
- Direct labor budget,
- Overhead budget,
- Selling and administrative Expenses Budget,
- Cost of Goods Manufactured Budget
- Schedule of Expected Cash Receipts from Customers,
- Schedule of Expected Cash Payments to suppliers,
- Cash Budget,
- Budgeted Income Statement,
- Budgeted Balance Sheet.
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 do not need by a non-manufacturing business.