Page 265 - DMGT202_COST_AND_MANAGEMENT_ACCOUNTING

Cost and Management Accounting

Notes 8. Target Costing recognizes that the costs of a product are established very early in the
....................... .
9. Cost Object ....................... is utilized to identify money losing customers.
10. ....................... provide the link between the expenditures of an organization and the
Activities performed within the organization.
11. ....................... is a simple, straightforward process that can have signifi cant impact on the
health and profi tability businesses.
12. ....................... is the graph that depicts the increases in productivity as reflected in reduced

average and marginal costs.
14.3 Master Budget

Master budget is a consolidated summary of the various functional budgets. A master budget is the
summary budget incorporating its component functional budgets and which is fi nally approved,
adopted and employed. It is the culmination of the preparation of all other budgets like the sales
budget, production budget, purchase budget, etc. It reality, it consists of the budgeted profi t &
loss account, the balance sheet and the budgeted funds flow statement. The actual composition

of the master budget depends upon the size and nature of the business. Still, all master budgets

represent the firm’s overall plan for the budget period.
The master budget can be split into two major pans: (1) The Operating Budget, and (2) Financial
Budget. All revenue aspects are included in the operating budget and all capital aspects are

included in the financial budget. The financial budget is based on the operating budget and the
balance sheet at the beginning of the fi nancial year.

In the master budget, costs are classified and summarised by types of expenses as well as
by departments. This information extends the range of usefulness of the master budget. It is
considered as the best mode of understanding the company’s micro-economic position relating
to the forthcoming budget period. Master budget is not merely a compendium of theoretical
calculations. The figures that it contains, are the reflection of the actual intentions of the company

relating to different areas for the forthcoming budget period.
Objectives of Master Budget
1. The master budget is prepared by the budget committee on the basis of co-ordinated
functional budgets and becomes the target of the company during the budget period when
it is fi nally approved.
2. This budget acts as the company’s individualized key to successful financial planning and

control.
3. It provides the basis of computing the effect of any changes in any phase of operations, such
as sales volume, product mix, prices, labour costs, material costs or change in facilities.

4. It segregates income, costs and profits by areas of responsibility. Master budget presents all
this information to the depth appropriate for the top management action.
Note: The detail discussion on master budget is given under Unit 8.

Self Assessment

State whether the following statements are true or false:
13. Master budget is a consolidated summary of the various functional budgets.
14. All capital aspects are included in the operating budget.
15. In the master budget, costs are classified and summarised by types of expenses as well as

by departments.

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