Master Budget

Master Budget
Ivan Hernandez
University of Phoenix









A master budget is an extensive analysis of the first year of the long term plan. According to Horngren, Sundem, andStratton (2008), the master budget consists of operating budget and financial budget. Components of the operating budget are sales, purchases, cost-of-good-sold, operating expenses, and income statementbudgets. Components of the financial budget are capital, cash, and balance sheet budgets.
Master budget is necessary to implement in companies because it provides the ability to:
• Implementstrategy by allocating resources in line with strategic goals
• Coordinate activities and assist in communication between different parts of the organization
• Provide a means to controlactivities
• Evaluate managerial performance
The complexity of the budget will depend on a number of factors, such as:
• Knowledge of past performance
• Understanding of market trends,seasonal factors, and competition
• Whether the business is a price leader or a price follower
• Understanding the drivers of business costs
• The control that managers are able toexercise over expenses
The master budget can be useful to forecast the cash flow of the company. The purpose of the cash forecast is to ensure the sufficient cash is available to meet the level ofactivity planned by the sales and production budgets and to meet all the other cash inflows and outflows of the business. Cash surpluses and deficiencies need to be identified in advance to ensureeffective business financing decisions, for instance regarding raising short-term finance or investing short-term surplus funds.
To avoid failure of the budget should be considered to use the followinginputs:
• Link the budget to the purchasing system. One of the best methods for controlling costs is to link the budget for each expense to each department to the purchasing system.
•...