Key Difference – Master Budget vs Flexible Budget
The key difference between master budget and flexible budget is that master budget is a financial forecast that contains all budgeted revenues and costs for the upcoming accounting year whereas flexible budget is a budget that is adjusted by incorporating the changes in the number of units produced. Both these budgets are considered important milestones in the budgetary control process. They are equipped with a number of uses such as cost control and performance measurement.
What is a Master Budget?
Master budget is a financial forecast of all elements in the business for the financial year prepared by combining many functional budgets such as sales budget, purchases budget, etc. These different budgets are interconnected and collectively provide accounting estimates for the upcoming financial period. Individual budgets will be prepared by each department, and the net outcome will be reflected in the master budget.
The master budget has two main components: operational budget and financial budget.
Operational budgets prepare forecasts for routine aspects such as incomes and expenses. While budgeted annually, operating budgets are usually broken down into smaller reporting periods, such as weekly or monthly
Types of Operational Budgets
- Sales budget
- Production budget
- Selling and administrative budget
- Cost of goods manufactured budget
Financial budget outlines how the company earns and spend funds at the corporate level. This includes capital expenditure (funds assigned to acquire and maintain fixed assets) and revenue forecasts from the core business activity.
Types of Financial Budgets
An explanatory text is usually provided which includes an explanation of the company’s strategic direction, the role the master budget will play in the achievement of company, objectives and the management actions intended on attaining the said objectives. Master budgets are usually presented in monthly or quarterly formats, for the entire financial year. Various other documents can also be presented along with the master budget in order to assist informed decision making. A document that consists of key financial ratios calculated based on information is included in the budget. These ratios will help to understand whether the master budget has been prepared realistically based on the actual past results.
Master budget preparation requires inputs of personnel from all the departments in the organization. There is a tendency of departmental managers to overestimate expenditure and underestimate revenues in order to achieve the budget easily. Furthermore, since business environments are constantly changing, budgets are often criticized as too rigid to adhere to.
What is a Flexible budget?
A flexible budget is a budget that adjusts or flexes for the changes in the activity level. Unlike in a static budget, which is prepared for a single activity level, a flexible budget is more sophisticated and useful. Here, irrespective of the budgeted volume of output, the revenues and costs will be compared with the adjusted results to the actual volume.
E.g. ABC Company incurred the following costs.
Selling price per unit = $14.6, material cost per unit = $2.50, labor cost per unit = $ 3, Factory overhead per unit = $2.4
ABC planned to sell 15,000 units for the month of March; however, managed to sell 18,000 units. Thus, the management decided to flex the static budget for the activity level of 18,000.
Flexible budgets are not rigid as static budgets; thus, are an appropriate tool for performance measurement to evaluate the performance of the managers. If the volume is fixed, then the managers can later claim that the demand and cost forecasts significantly changed from the budgeted levels and they were unable to achieve the budget. With a flexible budget, such situations will rarely occur. Flexible budgets are most appropriate for organizations that operate with an increased variable cost structure where the costs are mainly associated with the level of activity. On the other hand, flexible budgets are time-consuming and require more planning due to the alterations in activity levels.
What is the difference between Master Budget and Flexible Budget?
Master Budget vs Flexible Budget
|Master budget is a financial forecast that contains all budgeted revenues and costs for the upcoming accounting year.||Flexible budget is adjusted by incorporating the changes in the activity level.|
|The purpose of the master budget is to amalgamate many sub-budgets into a single one.||The purpose of the flexible budget is to allow better comparisons with the actual results by assessing them against the actual activity level|
|Master budget is prepared for a single activity level since is a static budget.||Flexible budget can be prepared for multiple activity levels.|
Summary – Master Budget vs Flexible Budget
The difference between master budget and flexible budget mainly depends on the purpose they are prepared for. The budget prepared by amalgamating all the sub-budgets is referred to as the master budget whereas the budget that is prepared is for different activity levels is referred to as the flexible budget. If budgets are used effectively, they enable a wider range of benefits including revenue growth and effective cost control. Flexible budgets are particularly useful for organizations that have variable cost structures.
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