Quiz 9: Financial Planning and Analysis: the Master Budget


Budget as a tool for communication and co-ordination: Every organization tries to be effective in achieving its goals. This required all the members of the organization to work together. For this purposes each employee and each manager must be aware of the plans made of other manager. The budgeting process helps in making this possible as it consolidates the plans of each manager. In this context coordination and communication play an important role. In other words, the budget facilitates 'coordination' and 'communication'. The budget facilitates; -Coordination can be attained by means of consolidation of all the potential factors of the blue print (budget). -'Communication' by making all the members of the organization i.e., managers and employees understand and accept the objectives of the organization.

The main sources of income for university are from fees receipts, exam fees, interest on investments etc., and the expenses are salary and general expenses of each department in the university, expenses on co-curricular activities, rent of building bank charges etc. 1. Using budget, the university can estimate the cash inflow and outflow for the budget period. Cash requirement can be estimated. 2. Budget is a useful tool for a university to calculate its estimated expenditure and compare the actual activity. 3. Using budget, university can improve the cost effectiveness and cost reduction as prediction of the inflation rate, the interest rate and tuition level can be incorporated in the budgets.

Master budget: A 'Master Budget' is a comprehensive set of budgets covering all phases of an organization operation for a specific period of time, generally one financial year. It is a comprehensive expression of management's operating and financial plans for a future period which are summarized into a set of financial statements. The master budget takes into account the following decisions: a) Operating decision - concerned with the use of scarce resources; and b) Financial decision - concerned with how to procure funds to acquire the scarce resources stated in the operating decisions. Parts of the master budget are as follows: 1) Budgeted balance sheet 2) Budgeted income statement 3) Budgeted cash flows 4) Cash budget 5) Operational budgets like Direct Material Budget, Direct Labor Budget, and Overhead Budget etc.