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Assessed Discussion Question

The master budget is a detailed and comprehensive analysis of an organization’s long- and short-term goals. Identify the major inputs to the master budget and the usefulness of each.

The major inputs to the master budgets are the operating budget and the financial budget. The operating budget or profit plan, “focuses on the income statement and its supporting schedules or, in an organization with no sales revenues, on budgeted expenses and supporting schedules (Horngren at el, 2008, p. 304). And the financial budget, “focuses on the effects that the operating budget and other plans (such as capitol budgets and repayments of debt) will have on cash balances” (Horngren at el, 2008, p. 304).

Why would a company need to create a master budget?

A company will need to create a master budget because it is great tool for planning and control functions. The processes of an organization are very complex and it requires a lot of effort to coordinate and maintain. One of the biggest challenges of a manager is coordination; therefore, establishing a master budget will be important in the coordinating effort.

What are the advantages and disadvantages?

Communication and motivation are advantages of establishing a master budget. A master budget acts as a communication device for the employees within each functional area to see how their efforts contribute to the goals of the company. Communication enhances morale and employee satisfaction.

However, uncertainty is a disadvantage of establishing a master budget. When a budget is established, it includes a lot of forecasting, and with forecasting comes uncertainty. Forecasting revenue can place a serious stipulation on planning because of the factors that has to be considered (e.g., the economy).

Reference:

Horngren at el. (2008). Introduction to Management Accounting (14th ed.). New Jersey: Pearson-Prentice Hall.