Question

Describe the master budget and each of the separate parts of the master budget. How does a flexible budget differ from the master budget? Which do you feel is more useful and why?

Answer 1

A master budget is a set of interconnected budgets of sales,production costs,purchases,incomes etc. It is the aggregation of all lower level budgets produced by a company various functional areas and it also includes proforma of financial statements,a cash forecast and a financial plan.It is the central planning tool that a management team usues to direct the activites of a corporation, as well as to judge the performance of its various responsibilites centers.

The master budget includes three main parts: the operating budget, capital expenditure budget, and financial budget. The operating budget is the set of budgets that projects sales revenue, cost of goods sold, and administrative expenses, all of which feed into the budgeted income ststement that projects operating income for the period. The capital expenditures budget presents the company's plans for purchasing property, plant, equipment, and other long-term assets.The financial budget includes the cash budget and the budgeted financial statements, budgeted income statement, budgeted balance sheet, and budgeted statement of cash flows.

There is difference between flexible and master budgets like :

1. Master budget is financial forecast that contains all budgeted revenues and costs for the upcoming accounting year and flexible budget is adjusted by incorporating the changes in the activity level.

2. The purpose of the master budget is to amalgamate many sub-budgets into a single one and the purpose of flexible budget is to allow better comparisons with the actual results by accessing them against the actual activity level.

3.Master budget is based on one specific level of production and a flexible budget can be prepared for any production level within a relevant range.

4. Master budget contains all costs but flexible budget contains only variable costs.

5. Master budget is based on a fixed standard and flexible budget allows management latitude in meeting goals.

6. Master budget is only used before and during the budget period and a flexible budget is only used after the budget period.

The difference between master budget and flexible budget mainly depends on the purpose they are prepared for. If budgets are used effectively, they enable wider range of benefits including revenue growth and effective cost control. i prefer flexible budgets as they are not limited to a specific period and organisations that have variable cost structures can use it efficiently.