Page 123 - DCOM206_COST_ACCOUNTING_II

Cost Accounting – II

Notes
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Caution Research and development is normally a long-term budget. It is prepared for
each project separately and should be sub-divided into short-term budgets on annual
basis. This budget is not a part of production budget. The research and development
budget provide information regarding control of research and development cost.

9. Cash Budget: Cash budget is another important budget. Its object is to indicate
the flow of funds and their requirements. It takes into account the amount
received from Sales – cash sales and payments made by credit customers and
the expenditure to be incurred in cash – both capital and revenue. The budget
shows up whether and when arrangements should be made for overdraft,
loans, etc.
(b) Master Budget: It is defined as a budget which is prepared from and summarises, the
functional budgets. The term summary budget is synonymous. In short, when all
the functional budgets are prepared, they can be summarised to produce:
(a) Budgeted profit and loss account (including appropriations), and

(b) Budgeted balance sheet.
A master budget commonly takes the form of a budgeted profit and loss account and
budgeted balance sheet. Budgeted funds flow may also form part of a master budget.
Therefore, a master budget is an overall business plan and is akin to familiar financial
statements, the major technical difference is that here one is dealing with expected
future data rather than with historical data.
The budget committee will prepare the master budget on the basis of coordinated
functional budgets. When it is approved by the committee, it becomes the target for
the company during the budget period.
Advantages of Master Budget

Following are the main advantages of master budget:
(a) It provides a summary of functional budgets,
(b) It projects the overall estimated profit of the business or organisation for the
budget period,
(c) The summary helps in checking the accuracy of functional budgets as the
information disclosed in functional budgets should agree with the information
provided in the master budget,
(d) Forecast balance sheet can be prepared easily as the budget in question provides
necessary information for the purpose, and
(e) The top management is often interested in having meaningful information of
the organisation in summarised form.
(C) On the Basis of Flexibility: On the basis of flexibility, the budgets may be classified into
two categories as fixed budget and flexible budget.

(a) Fixed Budget, and
(b) Flexible Budget.
(a) Fixed Budget: A fixed budget means a budget which is prepared on the basis of a
standard or fixed level of activity. According to CIMA terminology, the fixed budget
is, “A budget which is designed to remain unchanged irrespective of the volume of

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