Most business organizations are too large to permit the detailed planning of the entire business in one budget. It, therefore, becomes necessary to use various functional or subsidiary budgets and then to co-ordinate them in a Master Budget.
A master budget is a summary budget for the entire enterprise which embodies the summarized figures for various activities. In simple words, it is the coordinated and summarized budget of the entire budgetary programme. According to I.C.W.A. England
The Master Budget is the summary budget incorporating its component functional budget.
A master budget represent the overall plan of the enterprise. It is, therefore, principal planning budget. The various items depicted in the master budget include sales costs, production, profits, amass capital and profit appropriations etc. There is no unanimity of opinions regarding the content and the form of master budget Management Accountants have often regarded the budgeted Profit and Loss A/c and Balance Sheet as the master budget. Actually, the lay out of the master budget is not yet standardized.
Functional or Subsidiary Budgets
A Master budget is compiled from various functional budgets. A budget relating to a department is known as a functional budget. According to I.C.W.A. England;
Functional budget is a budget of income or expenditure appropriate to, or the responsibility of a particular function.
Different Components of a Master Budget
A. Operating Budgets –> Sales Budgets, Production Budgets, Cost Budgets
B. Capital Budgets
C. Financial Budget
A. Operating Budgets
Operating budgets are also known as revenue budgets or income and expenses budget. They assume the form of budget income statement covering the entire operations of the firm. The operating budget is prepared in two parts : programme budget and responsibility budget. The main components of the operating budget are : sales budget, production budget and cost budgets. The production is a quantity budget while others are value budgets. A brief description of these budgets is as follows:
(1) Sales Budgets
The entire operations of the enterprise are planned around the volume of activity expected during a definite period. A sales budget, therefore, is a nerve center of the operating budget. It lays down the sales potential in terms of quantity, value, period, area and product etc. It lays down a comprehensive sales programme, plan and organization for developing sales. The preparation of a sales budget starts with the sales forecast. This forecast is prepared for each product separately. In projecting sales for a particular year various factors are taken into consideration for example past historical data of sales, present conditions of the firm and general economic conditions etc.
(2) Production Budget : A production budget is a quantity budget which lays down the quantity of units to be produced during the budget period. The main purpose of this budget is to maintain an optimum balance between sales, production and inventory position of the firm. It is also known as output budget because it depicts the quantitative estimates of output for the budget period as well as also the estimates at different control period within the budget period. The quantity of output to be manufactured during a budget period may be expressed either in terms of number of articles weight or standard hours.
(3) Cost Budget : After finalizing the sales budget and production budget, cost budget is prepared. For the preparation of a detailed and comprehensive cost budget, the different cost- selling and distribution costs, advertising costs, research and development costs are separately estimated under different sub-budgets. Further, this production cost budget is sub-divided into various sub-budgets like raw-material budget, labor budget, plant and equipment utilization budgets etc. The material budget is prepared by the head of manufacturing department.
This budget lays down the quantity of raw materials required for production during the budget period. Labor budget lays down the estimates of labor requirements necessary to carry out the estimated production. It may be sub-divided into part-direct labor cost and indirect labor cost. An expense budget is prepared for estimation of future costs. These costs relate to the various segments of operating activity, i.e., manufacturing office and administration etc. As such manufacturing costs budget, administration costs budgets and selling and distribution costs budgets.
B. Capital Budgets
Capital budgets are those budgets which lay down the estimates in respect of the capital resources of the firm. They specify the capital intentions of the management and as such reflect. The management policy in respect of investments, , expansion , growth, contraction , production and profits. In setting out these budgets the management usually considers a set of alternative forecasts.
C. Financial Budgets
The financial budget presents a stigmatization of anticipated receipts and disbursements for the budget period. Its purpose is to plan for the allocation of working capital as represented by the current assets of the enterprise. It indicates the need of capital at various times and help the management in planning and providing the proper quantity of cash to meet the needs of the business. It provides information of the probable profits to be realized during the budget period and help the management in making the long-term plans.