Budgeting Cycle and Master Budget
Well-managed companies usually cycle through the following budgeting steps during the
course of the fiscal year:
1. Working together, managers and management accountants plan the performance of
the company as a whole and the performance of its subunits (such as departments or
divisions). Taking into account past performance and anticipated changes in the
future, managers at all levels reach a common understanding on what is expected.
2. Senior managers give subordinate managers a frame of reference, a set of specific
financial or nonfinancial expectations against which actual results will be compared.
3. Management accountants help managers investigate variations from plans, such as an
unexpected decline in sales. If necessary, corrective action follows, such as a reduction
in price to boost sales or cutting of costs to maintain profitability.
4. Managers and management accountants take into account market feedback, changed
conditions, and their own experiences as they begin to make plans for the next period.
For example, a decline in sales may cause managers to make changes in product features
for the next period.
The preceding four steps describe the ongoing budget process. The working document at
the core of this process is called the master budget. The master budget expresses management’s
operating and financial plans for a specified period (usually a fiscal year), and it
includes a set of budgeted financial statements. The master budget is the initial plan of
what the company intends to accomplish in the budget period. The master budget evolves
from both operating and financing decisions made by managers.