Different Parts of the Master Budget

Different Parts of the Master Budget
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  • 0:03 What Is a Master Budget?
  • 0:50 Why Have a Master Budget?
  • 1:49 Elements of a Master Budget
  • 2:59 Finishing the Overview
  • 3:58 Line Items in a Master Budget
  • 4:53 Lesson Summary
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Lesson Transcript
Instructor: Kevin Newton

Kevin has edited encyclopedias, taught middle and high school history, and has a master's degree in Islamic law.

One of the most important documents that a company produces is the master budget. And, as you might expect, it is as thorough as it is important. In this lesson, we look at the parts and function of a master budget.

What Is a Master Budget?

You're the head of accounting for a large business and it's time to present the budget to the board of directors. In addition to all the usual hesitation you feel about speaking in front of people who have complete and utter control over your job, you also can't help but feel that the world of numbers may be lost upon them. After all, they're all very busy individuals, and they may not be as impressed by the sea of numbers as you are. Luckily, you have a solution. Yes, you still have to provide a detailed budget, featuring breakdowns by department and by quarter. However, on top of it all, you have a secret weapon. By using a master budget, you can give the board exactly what it wants: a concise but complete view of all the numbers for the organization. And, you'll put this master budget together by assembling all of the other budgets throughout the organization.

Why Have a Master Budget?

That ability to quickly look at a single page and get an idea of the financial state of an organization is a key reason to have a master budget. However, you don't just need to be concise for management and the board of directors. Think about your stockholders - don't they deserve an easy way of seeing how much money the firm is making? And what about the regulatory agencies to which businesses have to report their financial paperwork? The first page of a typical master budget, the overview, provides just such summary information.

Furthermore, by producing a master budget you can also give everyone within the organization a sense of their piece of the action. As a result, they can have a good idea of the state of the firm so that they can make their own proposals more useful. For example, if your firm is making plenty in profits, department heads could use this information from the master budget to make bigger requests to increase their departments' long-term efficiency. If your company was posting losses instead, such requests would come across as insensitive to the needs of the firm as a whole.

Elements of a Master Budget

As you might expect, there are plenty of parts that go into building a master budget. Let's take a few minutes to look at them now. We've already covered the overview, but that's typically just page one. Next you'd have the sales budget, which shows your expected sales for the term in question. Then you'd have the production budget, which shows all the costs associated with production. Often this is broken into three parts: the direct labor budget, which shows the costs of labor for production only; the direct materials budget, which shows costs of materials for production only; and the manufacture overhead budget which shows any overhead costs associated with manufacturing goods.

But wait, there's more! The ending finished goods inventory budget allows us to figure out how much to charge for each good to make a profit based on the existing figures, while the cash budget makes sure we're using cash on hand efficiently. Further, the selling and administrative expense budget takes into account all expenses not associated with manufacturing goods. And finally, the budgeted income statement shows whether a company has the financial ability to do what it needs to do, while a balance sheet concisely lists any and all assets and liabilities to the company.

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