Q. 4. What are functional budgets? Which functional budgets are commonly used by the Management?

The budget satisfies different purposes. Thus different types of budgets are commonly used. The budget can be grouped as:
1. Time budget. Short period or long period budget.
2. Functional budget.

Functional budgets

Functional Budget is that budget which is associated with the functions of an organization. For examples: Sales budget, Production budget, Labor budget, Cost budget, Overhead budget, Capital expenditure budget and Cash budget etc.

Types of Functional budgets

(1). Sales budgets

it is the first budget which is an estimate of expected sales during the budget period. It is also known as the backbone of the organization. The sales budget is the starting point in budgeting the other budgets are based on Sales budget. The sales manager is responsible for preparing the sales budget. The procedure of sales budget is as:

(i). Data for past Sales. The sales budget is based on past sales figures into the account. The sales of the last many years speak about ups or downs in the Sale values.

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(ii). Production budget. The production budget is based on the sales budget. Once the sales quantity and values are determined, then arises the problem of how much to produce to meet the budget sales. The production budget is an estimate of the quantity of goods that must be produced during the budget period. While preparing production budget, the sales forecast, stock of closing stock and opening stock, plant capacity, purchase of other related part are taken into account.

(2). Production Cost Budget

Production cost budget shows in detail the estimated cost of carrying out the production plans as per the production budget. It represents the cost of various elements of production cost such as material, labor, and overheads fixed or variables and semi-variables. The cost can be expressed as a product or department-wise.

(3). Purchase Budget

Purchase budget is concerned with purchases for the period of the budget. It is referred to the purchase of raw materials, fixed assets, services like electricity and gas etc. The main object of the purchase budget is to formulate a plan which will allow all purchases at a minimum cost.

(4). Labor Cost Budget

Labor Cost Budget lays emphasis the labor requirements to meet the demand of the company during the budget period. The labor cost budget always focuses on Direct and Indirect labor cost. The labor requirements are referred to the Personnel Department who is responsible for selection, training and promotion.

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(5). Promotion Overhead Budget

This budget represents the forecast of all production overheads to be incurred during the budget period. The factory overheads are classified as fixed, variable and semi-variable. While preparing this budget, consideration showed to be given to the level of equality likely to be achieved.

(6). Capital Expenditure Budget

This budget indicates the plans for addition in Capital expenditure (acquiring fixed assets) improvement in old Assets and replacement of fixed assets. These may be: Plant addition, new building, land and such as plants.

(7). Cash Budget

Cash budget represents the cash requirements of the business during the budget period. It compares the estimated Cash Receipts and estimated Cash payments of the company during the budget period. It ensures that sufficient cash is available when required.

(8). Master Budget

This budget combines all functional budget into one harmonious unit. It is a summary plan of overall proposed operations developed by management for the company, covering a specific period. It is a summary budget incorporating its functional budgets which is finally approved, adopted and employed. This budgeting contains the details of sales budget, production budget, cash budget etc. When it is complete, the budget committee will review all the details and if approved, it will be submitted to the board of directors. Once it is accepted and approved it becomes the target for the company during a specific period to achieve the desired target.

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