A master budget is a budgeting tool that is prepared based on manager’s approximation on the volume of sales while flexible budget shows the changes that would occur in budgeted cost if the actual amount differs by a given unit in a master budget plan. The preparation of the master budget involves various steps. Each step defines a specific budget plan of item (s) to be completed into a master budget plan. For instance, creating a master budget begins with the preparation of a sales budget which later guides the development of a production plan. In this step, all materials are converted into sales unit to determine the amount of units required to complete the projected sales.

In the second step, the management team prepares and posts Inventory and Expense Budgets into a master budget plan. This is done to quantify the number of materials, overheads, sales and administrative costs required to produce a specific projected volume of a product. Moreover, in the third stage, the management team completes a cash budget plan into a master budget plan. The cash budget is composed of the figures obtained from the sales, inventory and expense accounts in addition to cash balance from the previous financial year. Finally, a general Budgeted financial statement comprising of previous-period financial statements and the output of the current budgeting process is prepared to compute projected financial statements in the present fiscal year.

On the other hand, the flexible budget is prepared by first determining deciding on fixed cost and variable cost. Notably, during the preparation, the obtained expenditure on variable costs can be adjusted accordingly depending on the level of fluctuations in the activities. However, the fixed cost cannot be improved over any given range of operation. Therefore, it is essential that the company identifies direct labour and overhead costs. Once this is done, It is possible to compute the anticipated variable cost per unit produced and sold. The original budget is then ‘flexed’ to figure out the budget cost allowance for overheads and direct labour. Finally, the flexible budget comparison is made for the range of the period and variance computed to verify the pattern of sales.

The budget can take different forms and serves different functions regarding initial decision making within a business organization. The master budget, for instance, is an essential tool for projecting coordinating levels and costs of various activities at the start of a business. For example, by preparing a budget sale, the company can conduct an initial assessment of the projected volume of transactions via a master budget. Furthermore, the expected sales level assists the management team to calculate the planned production, administrative, and selling budgets. Consequently, the overall production budget drives the business into an informed decision on expected labour, materials overhead costs. Thus, the master budget provides an initial benchmark against which the management team pre-approve execution of spending plans.

Even though this flexible budget is solely used in an organization to evaluate business performance over a period, the tool is equally essential in initial decision making (planning) when prepared in advance. For instance, in a dairy manufacturing industry, the flexible budget can act as a tool in projecting alternative future volumes concerning temperature-based fluctuations in customer demand for a specific milk product such as ice cream. These fluctuations are essential for the management team in pre-planning daily staffing and purchases of milk and its products. All these are critical in deciding on future manufacturing plan of milk product. Therefore, a flexible budget helps to reveal to the company the aggregate expense level that is expected to be generated in future.

Furthermore, when prepared in the initial stages of a business, a flexible budget can help in making a pre-informed decision on the management of the smallest operating activities that will be adjusted in future as sales fluctuate. Finally, a flexible budget is vital in pre-examining on the expected performance of business about labour, material, and overhead costs.

References

Galbreath, S. C., Caldwell, C. W., & Rooney, C. (2014). Chapter 8 and 9; Managerial Accounting by Whitecotton, Libby, and Phillips (2^nd Ed.).