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  Master Budget

Introduction to Master Budget

All the budgets explained above are termed as 'Functional Budgets' that are ready for planning of the individual function of the organization. For instance, budgets are ready for Manpower Planning, Sales, Purchase, Production, and so on. A Master Budget that is also termed as 'Comprehensive Budget' is a consolidation of all the functional budgets. It depicts the projected Profit and Loss Account and Balance Sheet of the business organization. For preparation of this type of budget, all functional budgets are joint together and the applicable figures are associated in preparation of the projected Profit and Loss Account and Balance Sheet. So Master Budget is prepared for the whole organization and not for individual functions.

 Fixed and Flexible Budgets:

The fixed and flexible budgets are discussed in detail in the following paragraphs.

Ø   Fixed Budgets: while a budget is prepared through assuming a fixed percentage of capacity utilization, it is termed as a fixed budget. For instance, a firm may choose to operate at 90% of its total capacity and prepare a budget depicting the projected profit or loss at that capacity. This budget is described by The Institute of Cost and Management Accountants [U.K.] as 'the budget that is designed to stay unchanged irrespective of the level of activity in face attained. It is relies on a single level of activity.' Sales forecast will have to be ready with the cost estimates, for preparation of this budget. Cost estimates can be prepared through segregating the costs as per to their behavior that is fixed and variable. Cost predictions should be complete element wise and the projected profit or loss can be worked out through deducting the costs from the sales revenue. In fact practically, fixed budgets are prepared very seldom. The major reason is that the actual output different from the budgeted output considerably. So if the budget is ready on the assumption of producing 50, 000 units and in fact the number of units created are 40, 000, the comparison of actual results along with the budgeted ones will be misleading and unfair. The budget might expose the variation between the budgeted costs and actual costs but the reasons for the deviations might not be indicated. A fixed budget might be ready while the budgeted output and actual output are quite close and not much deviation present among the two. In such types of cases, maximum control can be exercised among the budgeted performance and actual performance.

Ø   Flexible Budgets: A flexible budget is a budget that is ready for dissimilar levels of capacity utilization. It can be termed as a series of fixed budgets ready for dissimilar levels of activity. For instance, a budget can be ready for capacity utilization levels of 50%, 60%, 70%, 80%, 90% and 100%. The basic principle of flexible budget is that if a budget is prepared for depicting the results at say, 15, 000 units and the actual production is only 12, 000 units, the comparison among the expenditures, budgeted and actual will not be fair like the budget was ready for 15, 000 units. So a flexible budget is developed for a relevant range of production from 12, 000 units to 15, 000 units. So though the actual production is 12, 000 units, the results will be comparable with the budgeted performance of 12, 000 units. Though the production slips to 8, 000 units, the manager has a tool which can be employed to determine budgeted cost at 9, 000 units of output. So the flexible budget gives a reliable basis for comparisons since it is mechanically geared to changes in production activity. So a flexible budget covers a range of activity, it is flexible that is easy to change with difference in production levels and it make easy performance evaluation and measurement.

Ø   When preparing flexible budget, it is essential to study the behavior of costs and divide them in fixed, variable and semi variable. After that, the costs can be estimated for a provided level of activity.

Ø   It is also essential to plan the range of activity. A firm might decide to increase flexible budget for activity level starting from 50% to 100% with an interval of 10% among. It is essential to estimate the costs and related them with the chosen level of activity.

Ø   Finally the profit or loss at dissimilar levels of activity will be calculated by comparing the costs with the revenues.

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