1. The Structure of a Master Budget
A Master Budget is a comprehensive financial plan that coordinates all individual departmental budgets for an upcoming period. It must be built in a specific, orderly sequence because output from one department serves as input for the next:
- The Limiting Factor: This is the primary constraint that limits a business’s growth (usually market demand or raw material shortages). The budget process must always start with the limiting factor—which is why most companies begin by drafting the Sales Budget.
2. The Cash Budget
The Cash Budget is a critical planning document that projects future cash inflows and outflows month-by-month. It helps managers spot upcoming cash shortages or surpluses early, allowing them to arrange bank overdrafts or plan short-term investments before issues arise.
3. Foundations of Standard Costing and Variances
Standard costing assigns estimated target costs to products based on planned material, labor, and overhead inputs. At the end of the month, managers perform Variance Analysis by comparing actual costs against these standard targets: [1]
- Favorable Variance (F): Occurs when actual costs are lower than standard targets, or actual revenues are higher than expected.
- Adverse Variance (A): Occurs when actual costs run higher than standard targets, or actual revenues fall short of projections.
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