1.4.1 Master budget
The master budget aggregates related budgets, or a family of budgets, which are produced by most organisations. A business is likely to have a range of budgets for varying departments within the organisation.
Some examples of the different budgets are:
- Sales budgets, for the sale of products. These budgets may be broken up by department or state office.
- Cash flow budgets, which are based on the expected cash from sales and other revenue generating sources and include payments of expenses, loans and capital equipment purchases.
- Budgets predicting the financial position at the end of the budget period, which includes expected assets, liabilities, planned inventory and cash at hand.
- General expense budgets covering all overheads, such as rents, plant and equipment and general administrative expenses.
- A further list is provided in the next major section under Budget Planning Processes
A manufacturing business will have a series of budgets covering production, inventory and purchases, sales of units and marketing expenses. These types of budgets, and others, are components of the "Master Budget" which is the overall collection of budgets for the operation of the organisation. Such budgets parallel Master and Aggregate Plans covered in the earlier operations planning component of this Unit of Study.
Each of these budgets is linked in some way to each other, for instance, marketing budgets will be determined by the projected volume of sales. The production budget will also take into consideration the budget for inventory of components required for the manufacture of items and capital expenditure budgets will be determined by the need to purchase or upgrade equipment or vehicles.
Most budgets reflect the cash flow whether they deal with sales, general expenses, direct labour or material purchases. Budgeting may lead to greater cash flow when the business exceeds its budget expectations (i.e there is positive variance). This could be due to increased, or the same level of output with less labour, which would reduce the cash paid in wages. This might also occur with an increase in sales without additional marketing costs.
It must be remembered that this would have the opposite effect if the variance were negative. For example, an increase in component costs or lack of efficiency in producing a product, would have a negative effect on cash flow. The figure below demonstrates the relationships between the components of a master budget.
Figure 2 Components of a master budget
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