What is a Master Budget?
A master budget is a comprehensive financial plan that pulls together all of a company's individual budgets into one master document. It guides operations, financing, and investing decisions for the coming period, usually a year broken into quarters or months.
A master budget is the set of interconnected operating budgets (sales, production, costs) and financial budgets (cash budget, budgeted income statement, budgeted balance sheet) that together forecast a company's entire financial future.
- 1↓Sales BudgetForecasts unit sales and sales revenue — the starting point for every other budget.
- 2↓Production BudgetDetermines units to produce based on the sales forecast plus desired ending inventory.
- 3↓Direct Cost BudgetsDirect materials, direct labor, and overhead budgets estimate the cost of producing those units.
- 4↓Cash BudgetProjects cash receipts and disbursements to spot shortages or surpluses.
- 5↓Budgeted Income StatementCombines revenue and cost budgets into a forecasted profit and loss.
- 6Budgeted Balance SheetShows the projected financial position at period end — the final output.
Step-by-step worked examples
A company forecasts selling 5,000 units at $40 each in Q1. Calculate the sales budget revenue.
Units = 5,000 Price = $40 Sales Revenue = 5,000 × $40 = $200,000
Budgeted sales are 5,000 units; desired ending inventory is 800 units; beginning inventory is 600 units. Find the production budget.
Production = Sales + Desired Ending Inventory − Beginning Inventory Production = 5,000 + 800 − 600 = 5,200 units
Beginning cash is $10,000, budgeted cash receipts are $50,000, and budgeted disbursements are $45,000. Find the ending cash balance for the cash budget.
Ending Cash = Beginning Cash + Receipts − Disbursements Ending Cash = 10,000 + 50,000 − 45,000 = $15,000
Flashcards
Quick quiz
Q1.Which budget is the starting point for the entire master budget?
Q2.Which of these is a financial budget, not an operating budget?
Q3.If sales forecast is 3,000 units, desired ending inventory 500, beginning inventory 400, what's the production budget?
Q4.What is the final output of the master budget process?
The full card deck, worked steps and AI-tutor support for “What is a Master Budget?” are in Notek — study by hand before your exam.
Common mistakes
Treating the master budget as just the cash budget. — Correct: The master budget includes ALL operating and financial budgets, not just cash.
Preparing the production budget before the sales budget. — Correct: Sales budget must come first since production depends on the forecasted sales.
Ignoring desired ending inventory in the production budget. — Correct: Production = Sales + Desired Ending Inventory − Beginning Inventory.
Assuming the budgeted income statement and cash budget are the same. — Correct: The income statement uses accrual accounting; the cash budget tracks actual cash timing.
FAQ
What is a master budget in accounting?
It's the complete set of operating and financial budgets a company prepares for a future period, starting with the sales budget.
What are the components of a master budget?
Sales, production, direct materials, direct labor, overhead, and SG&A budgets (operating), plus the cash budget, budgeted income statement, and budgeted balance sheet (financial).
How do you calculate the master budget?
Start with the sales budget, then build production and cost budgets from it, and finally combine everything into the cash budget and budgeted financial statements.
Why is the master budget important?
It coordinates every department around one financial plan and helps management anticipate cash needs before they happen.