Question

Budgeting (A) What is the master budget and its purpose; (B) what are the advantages of budgets; and (C) what is the operating budget and its components?

Answer 1

a) Master budget is the aggregate of all budgets prepared by different funtional area of the company, it also includes financial statement, cash flow and income statement. This budget also has a financial plan. The purpose of master budget is that it helps in the future strategic and financial plan for the company. It helps to forecast the future.

b) Advantages of Budget

The preparation of budget helps the company to identify the future financial need of the company.

It helps in future forecast and benefits of the existing operation

With the help of budgets the company can forecast its future requirements with regards to resources.

Budgets helps to compare with the actuals, this helps the company to know what leads to extra cost

c) Operating Budget is the estimate of income and expenses of the company over a period of time. The operating budgets consists of revenue forecast and the expenses related to this revenue forecast.