A functional budget relates to a specific function of a business, such as a sales budget, production budget, or purchase budget. These are components of the master budget, and the specific functional budgets prepared vary by organization. Examples include sales budgets, production budgets, labour budgets, cost budgets, overhead budgets, capital expenditure budgets, and cash budgets. The budgeting process typically begins with the sales budget, which provides the data necessary to prepare the production budget and the selling, general, and administrative budget. The production budget then informs the materials, labour, and factory overhead budgets.
Sales Budget
The sales budget estimates total sales, expressed either in financial or quantitative terms. It forms the foundation for all other budgets. Typically, the quantitative budget is prepared first, then translated into monetary terms. Sales are often the principal budget factor. Key factors to consider when preparing a sales budget include:
• Analysis of past sales to identify market trends.
• Sales estimates from sales personnel in various markets.
• Changes in business policy or methods.
• Government policies, controls, and guidelines.
• Potential market conditions and availability of materials and supplies.
Production Budget
The production budget is prepared based on estimated production for the budget period, usually derived from the sales budget. It considers the available facilities such as plant capacity, power, factory space, materials, and labour. It outlines the production program needed to meet sales targets and can be expressed in units, monetary value, or both.
Formula: Units to be produced = Desired closing stock + Budgeted sales – Opening stock.
Production Cost Budget
This budget estimates the cost of production, detailing material costs, labour costs, and factory overheads. It is based on the production budget, materials budget, labour budget, and factory overhead budget.
Purchase Budget
The purchase budget covers planned acquisitions of direct and indirect materials and services. It is expressed in terms of quantity or monetary value. Its purposes include designating cash requirements for purchases and enabling the purchasing department to plan operations and negotiate long-term contracts.
Labour Budget
The labour budget forecasts personnel requirements and costs. It can be divided into labour requirement and labour recruitment budgets. Requirements are determined for categories such as unskilled, semi-skilled, and supervisory roles, based on input from departmental heads. Employment decisions consider job requirements, skill levels, experience, and pay rates.
Production Overhead Budget
This budget estimates all production overheads—fixed, variable, and semi-variable—to be incurred during the budget period. Overheads are budgeted for each division of the factory, and service department costs are allocated to production departments based on the services received.
Capital Expenditure Budget
This budget covers planned spending on fixed assets over the budget period, often extending beyond other budget timelines. It includes investments in buildings, land, machinery, and intangible assets such as patents. Preparation considers production facility capacity, long-term technical developments, and potential product demand.
Cash Budget
The cash budget projects cash inflows and outflows for a specific period, ensuring the business maintains solvency. It is typically one of the final budgets prepared and is crucial for financial management. It helps identify liquidity requirements, plan for financing needs, and manage surplus funds.
Functions of the cash budget include:
• Ensuring sufficient cash availability.
• Identifying cash surpluses or shortages for investment or borrowing decisions.
• Determining if capital expenditures can be financed internally.
• Supporting planned business growth.
• Providing a basis for effective cash management.
Conclusion
Functional budgets are interdependent, beginning with the sales budget and cascading through production, materials, labour, overheads, capital expenditures, and cash budgets. Together, they provide a comprehensive financial plan to guide operations, control costs, and ensure effective resource allocation.
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