Budgeting
Kyle Ashcraft, CPA · 2019 CPA Exam Scores · 95 FAR · 98 BEC · 91 REG · 90 AUD
Planning a company's future starts with a budget: how many units to sell, how many to produce, and how much cash to expect coming in and going out.
What is the master budget?
Each year, a company creates a master budget — also called an annual business plan — composed of several individual budgets. It covers everything under two umbrellas: operating budgets and financial budgets.
Why is the master budget called static?
The master budget is built on one level of activity, estimated in advance, and it doesn't change over the course of the year. Say an airplane manufacturer estimates it will sell 200 airplanes this year — the entire master budget is built around that single number. The company isn't planning a separate version for what happens if it only sells 60, or a different one for 300. That's what makes it static: one estimate, locked in for the year.
What order are budgets created in?
Operating budgets come first, then financial budgets. You can't build the financial budgets — the cash budget and pro forma statements — until you know the operating numbers (sales, production, materials, and labor) that feed into them.
The master budget is a single, locked-in plan for the year. It's static by design — built on one activity estimate, with operating budgets first and financial budgets built on top of them.
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Kyle Ashcraft, CPA scored 90 or above on every section of the CPA exam in 2019, including a 98 on BEC. He is the founder and sole instructor of Maxwell CPA Review, a complete CPA review course covering all six sections, where he creates every lecture, textbook and study outline himself.