What is the purpose of the master budget and how does it relate to the operating budget?

• A. The master budget consolidates all individual budgets into a comprehensive plan; the operating budget is a component detailing income and expenses.
• B. The master budget is a financial plan for one department; the operating budget is separate.
• C. The master budget is only about cash flows; the operating budget is about production planning.
• D. The master budget is a rolling forecast; the operating budget is fixed.

Answer: (A)

A master budget is the company’s overall financial plan for a period, tying together all the individual budgets into one comprehensive plan. It brings together budgets for sales, production, materials, direct labor, overhead, selling and admin, capital expenditures, and the cash budget, so the whole business plan can be seen in one place. The operating budget is the part of that plan that shows expected revenues and operating costs, essentially outlining the income statement for the period. The budgets for sales drive the production and other input budgets, so the operating budgets explain how the projected revenue translates into costs and profitability. In short, the master budget provides the big-picture plan, while the operating budget focuses on the expected operating performance that feeds into that plan.