Question

If you were asked, which component of the master budget would you consider the most important? Should all firms develop the master budget, an operating budget, and a financial budget? Support your answers with references.

Answer 1

Component of the master budget, I would consider the most important is Income and expenses( Financial Budget).  It is considered as most important as it helps us understand the overall financial strenghts and utilisation of funds. Advantage of having a master budget is the ability to identify problems and plan ahead like,master budget can show department is spending beyond its limit, causing the company to spend more than it is earning each month.

YES, All Firms should develop the master budget, an operating budget, and a financial budget because-

1.It works as a comparative tool on basis of which past performances could be compared with the current year.

2.It is customised and prepared according to the convenience of the entity. it could be prepared for different time frames.

3.It can work as a motivational tool for employees as they can compare their actual performance with the standard and prepare for the best.

4.Master budget has the ability to identify problems and plan ahead and it helps in forecasting too.