Question

Explain the following budget terms: master budget, financial budget schedules and operating budget schedules.

Answer 1

Master Budget: Budgeting usually starts at lowest level of budgeting starting from each department, role and function. This budgeting is then rolled up and aggregated to the master budget. Hence the master budget incorporates all other budgets in an organisation and is presented either in a monthly or quarterly format, but usually for the entire year. A master budget is reviewed multiple times due to multiple iterations of required budget from each functional department before getting finalised and which then forms the basis of allocating funds to the respective department as per the plan to achieve organisation objective.

The master budget can be broken down into 3 schedules for Financial budget and 8 schedules for Operating budget

Financial budget schedules: The three financial budget schedules are Cash budget, Budgeted Balance Sheet and Capital Expenditure. Cash budget deals with the cash inflows and outflows and basically includes anything which deals in cash like funding, investing, payment, receipt etc. and arrive at the cash in hand at the end of the each period, if all budget factors hold true. Similarly Budgeted balance sheet states the financial position of the organisation at the end of each period consisting of assets and liabilities if all the budgeted factors come true. Again Capital Expenditures would list down the large capital investments like large machinery etc. for each period of the budget year.

Operating budget schedules: Operating budget consists of eight schedules but foremost comes the sales budget which forms the basis of the formation of most of other budgets and is very important as sales drive any business. Based on the sales budget, production schedule is prepared so that the sales can be achieved smoothly keeping normal levels of stock in hand at all times. Now based on the production schedules comes the requirement for raw materials, labour and overheads which would be required to complete the production in time for each period. Next the finished goods inventory and cost of goods sold budget is prepared. On the basis of above operation budgets, finished goods inventory is determined which finds its place in the balance sheet and on the basis is finished goods value, cost of goods sold is calculated. Again the last budget is the administrative budget which deals with administrative expenses, selling expenses and other non production costs.