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FALL 2021
Managerial Accounting.
BAAC2213

Assignment No. 004

Name of Course Instructor: Mr. Abid Noor

Course Name: Managerial Accounting

Section: (A)

Submitted by: Abdullah Imran

Question:-

Define and explain master budget. Explain in detail the routs to master budget. Also

explain in detail all those budget what in comes in route to the master budget?
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Master Budget:-

A master budget is the central planning tool that a management team uses to direct the activities

of a corporation, as well as to judge the performance of its various responsibility centers.

All the functional divisions of the organization prepare the budget for the particular

division. The master budget is the sum total of all the divisional budgets that are prepared by all

the divisions. Further, it also includes the financial planning, cash-flow forecast, and budgeted

profit and loss account, and balance sheet of the organization. It is the goal of the organization to

reach a level in a particular period. The master budget is typically presented in either a monthly

or quarterly format, and usually covers a company's entire fiscal year.

Routes to Prepare Master Budget:

The budget that roll up into the master budget include:

 Operating Budget

An operating budget is a detailed projection of what a expects its revenue and expenses will

be over a period of time. Companies usually formulate an operating budget near the end of

the year to show expected activity during the following year.

An operating budget helps organizations sets and achieve business goals. Each month or

quarter, managers can compare actual results to the operating budget and analyze the

outcomes.

1. Sales Budget.

2. Production Budget.
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3. Labor Budget.

4. Manufacturing Overhead Budget

5. Administrative Budget.

6. Cash Budget.

 Financial Budget

A financial budget in budgeting means predicting the income and expenses of the business on

a long-term and short-term basis. Accurate projections of cash flow help the business achieve

its targets in the right way.

The organizations prepare the financial budget to manage the cash flows in better way.

This budget gives the business a better control and efficient planning mechanism to

manage the inflows and outflows.

1. Cash budget.

2. Budgeted Balance Sheet.

3. Capital Expenditure.

Also explain in detail all those budget what in comes in route to the master budget?

Master Budget(Operating Budget).

1. Sales Budget:

The Sales Budget is the foundation of the master budget. All the procurements, staff
requirements, and administration costs are based on sales. First and foremost, the number of
units to be sold and the price per unit is derived. On the basis of that, the value of sales is
calculated.
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The sales budget is prepared based on considering the following factors:

 Market demand estimation

 Production capacity or an infrastructure facility
 Current supply facility
 Industry analysis

Market demand and production capacity are determined with the help of the Marketing division
and production division respectively.

2. Production Budget:

The Production Budget is mainly based on the sales budget. However, the following factors shall
be considered;

 Inventory at the beginning of the year

 Inventory to be maintained at the end of the year
 Number of units manufactured
 Buffer stock to be maintained throughout the year

The production budget is divided into further two parts:

 Direct Material Budget:

The direct materials budget calculates the materials that must be purchased, by time
period, in order to fulfill the requirements of the production Budget. It is typically
presented in either a monthly or quarterly format in the annual budget.

 Direct labor budget:

The Direct Labor budget is used to calculate the number of labor hours that will be
needed to produce the units itemized in the Production Budget. A more complex direct
labor budget will calculate not only the total number of hours needed, but will also break
down this information by labor category.

If the company is not having a manufacturing unit, we require a number of units to purchase
instead of the production budget.

3. Capital, Assets Budget:

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The plant, machinery, and equipment require periodical maintenance and replacement. If the
sales target is higher than the previous period, new plant and machinery also need to be
introduced. Therefore, careful planning of the Capital Assets has to be done.

4. Manufacturing Overhead(MOH) Budget:

The manufacturing overhead budget contains all manufacturing costs other than direct
material and direct labor . The information in this budget becomes part of the cost of goods
sold(CGS) line item in the master budget.

The total of all costs in this budget are converted into a per-unit overhead allocation, which
is used to derive the cost of ending finished goods inventory, and which in turn is listed on
the budgeted balance sheet.

5. Administrative Budget:

The Administrative expense budget is comprised of the budget of all non-manufacturing

departments, such as the sales, marketing, accounting, engineering, and facilities
departments. In aggregate, this budget can rival the size of the production budget, and so
is worthy of considerable attention.

The budget is typically presented in either a monthly or quarterly format. It may also be
split up into segments for a separate sales and marketing budget and a separate
Administration budget.

6. Cash Budget:

For all the divisional budgets, the organization requires cash. It needs to ensure that during
the year it does not run out of cash due to poor planning in preparation for the budget. On the
basis of the sales and production budget, it is derived that what is the expected receipts and
what are the expected payment.

The receipt and payment cycle of the customer and supplier need to be analyzed. At this
stage, the organization decides whether external borrowing is required or not.
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All the administration expenses such as interest on borrowing, staff cost, office rent, legal
expenses, office supplies, etc. are to be considered while preparing the cash budget. Some
factors also are dependent on the sales budget such as the CEO’s salary based on
performance or the performance bonus to sales staff.

Master Budget( Financial Budget).

1. Budgeted Balance Sheet:

The budgeted balance sheet contains all of the line items found in a normal balance sheet,
except that it is a projection of what the balance sheet will look like during future budget
periods. It is compiled from a number of supporting calculations, the accuracy of which may
vary based on the realism of the inputs to the budget model.

A budgeted balance sheet should be constructed for each period spanned by the budget
model, rather than just for the ending period, so that the budget analyst can determine
whether the cash flows estimated to be generated will be sufficient to provide adequate
funding for the company throughout the budget period.

2. Capital Expenditure Budget:

A capital expenditure budget is a formal plan that states the amounts and timing of fixed
asset purchases by an organization. This budget is part of the Master budget used by a firm,
which is intended to organize activities for the upcoming year.

Capital expenditures can involve a wide array of expenditures, including upgrades to existing
assets, the construction of new facilities, and equipment required for new hires.

 Advantages of Master Budget:

1. Motivation to staff.
2. Summary of divisional Budget.
3. Planning in Advance.
4. Helps in Achieving goals.
5. Continuous Improvements.

 Dis-advantages of Master Budget:

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1. Difficulty of Update.

 Applications of Masters Budget:

1. Important planning Tool.

2. Measures performance.
3. Interdivision Coordination.