Question

What are the primary benefits of effective budgeting? What are the main components of the master budget?

Answer 1

Benefits of effective budget are -

• Budget act as financial road map wherein business aim and performance targets are determined. Thus it enables management to conduct its business in efficient manner.
• Budget ensures best use of all available resources to maximize profit.
• Budget helps in controlling of expenditure. It acts like a yardstick for measuring the performance.
• Helps in providing basis for comparison of actual performance with the targeted performance. This further helps in taking corrective actions.
• Budgets are internal control tool for management and often helps in risk mitigation.

Master budget are basically budget summaries. They integrate budgets of all departments. Master budget comprises of operating budget, capital expenditure budget and financial/cash budget.

Operating budget in turn comprises of –

• Sales Budget
• Cost of Goods Sold Budget
• Production budget
• Direct materials purchases budget
• Direct labor cost budget
• Factory overhead cost budget
• Selling and administrative expenses budget etc.

Financial Budget further comprises of –

• Budgeted Income Expense Statement,
• Budgeted Balance Sheet
• Cashflow Statement