Question

Explain various components of master budget and its importances and also explain what is meant by flexible budget.

Answer 1

Master Budget

A Master Budget is useful in projecting the income and expenses of a firm. A small business owners can generate a number of reports from the master budget which can help them set specific business goals.The major components of a master budget are

• Income and expenses
• overhead and production costs
• monthly, annual, average and projection totals.

Business Income component

One of the two major components of the master budget is income. Income includes the salary, any interest, dividends, royalties or any other capital gain that we earn out of the business. If you are bot currently using the latter forms of income in your business,then you can drop them off your budget and compile only the operating budget which includes the income which arises out of sales.Some master budget may contain a bad debt entry which is calculated as a percentage of the sales income.

The Company Expense component

The other major component of a master budget is the expenses. Most of the small business owners compile a budget containing the sub-component of the master budget expenses to figure out the expenditures to be cut down when business slow down or to help calculate the production and the overhead costs.

Overhead and production costs

Once the master budget is completed, you can separate the overhead and the production costs to help in pricing the product or service. This will help you in identifying the costs that is directly associated with the production of each unit or delivering a particular service. Depending on the type of business, these costs might include machinery, materials, additional energy or labor. These can be marked as the production costs.

Net income or loss

A general component of a master budget is the "Total function"which shows how a business is performing each month and every year.Income and expenses may be summed up on a monthly basis to show the net income or loss each month. You can also total your income and expenses by category to witness how a particular function of your company is performing. You can use the totals to track the monthly income and expenses. Totals help manage the cash flow of a business if a separate budget is prepared that shows when the bills are due and when income is expected rather than utilizing the monthly averages.

Project Annual performance

A useful and a vital component in many budgets is the projected total column which shows how you will be your performance at the end of the year if you continue performing at the current levels of income and spending.

Other budgets and reports

Some businesses create a master budget in line with the other budgets which may include sales, marketing, general and administrative, production, labor, materials and overhead costs. This helps the other departments to update their numbers on the master budgets suitably which alerts the top management about the possible opportunities or threats when a particular department change the level of their performance.