A master budget is part of an overall organization plan for the next year, made up of three components: (1) organizational goals, (2) the strategic long-range proﬁt plan, and (3) the master budget (tactical short-range proﬁt plan).
Long-range plans are achieved in year-by-year steps. The guidance is more speciﬁc for the coming year than it is for more distant years. The plan for the coming year is called the master budget. The master budget is also known as the static budget, the budget plan, or the planning budget. The income statement portion of the master budget is often called the proﬁt plan. The master budget indicates the sales levels, production and cost levels, income, and cash ﬂows anticipated for the coming year. In addition, these budget data are used to construct a budgeted statement of ﬁnancial position (balance sheet).
Budgeting is a dynamic process that ties together goals, plans, decision making, and employee performance evaluation. The master budget and its relationship to other plans, accounting reports, and management decision-making processes are diagrammed in this diagram:
Although each organization is unique in the way it puts together its budget, all budgeting processes share some common elements. After organizational goals, strategies, and long-range plans have been developed, work begins on the master budge, a detailed budget for the coming fiscal…