A manufacturing business is typically more complex than a business that just buys and sells, there is a wider range of budgets for a manufacturing business that may be used to build-up to the master budget and cash budget. The budgets will need to be based on the same set of assumptions about the way that the organisation operates and will have been built up around estimates of the ‘Key budget factor’ – usually the sales forecast.
Budgets for a manufacturing business
The budgets would typically include:
Sales budget usually generated directly from the key factor forecast data.
Production budget based on the sales budget together with anticipated finished materials stock levels.
Materials usage budget
This budget is based on the production budget.
Materials purchases budget
This is based on the materials usage budget, together with the anticipated materials stock levels.
Labour utilization budget
This is also based on the production budget.
Various functional budgets
These budgets are prepared to support the manufacturing business’s operations. For example, the administration budget and the finance budget.
Capital expenditure budget
The cash budget would then be developed to take account of the data in the above budgets.
The effect of all the revenue and capital budgets is finally consolidated into the master budget. This would take the form of a budgeted profit and loss account and balance sheet for the whole manufacturing business.
A note on stock levels
You will have noticed several references in the above list of budgets for a manufacturing business to stock levels. Where stock levels are to remain constant the situation is simple. For example, the production budget will be identical to the sales budget if the finished goods stock level is to remain unchanged. however, if the stock level is to increase then the extra units of goods that will go into stock will need to be produced in addition to the units that are to be sold immediately. This is a concept that is important throughout budgeting, including the preparation of the cash budget.
Integration of budgets in a manufacturing business
The diagram below shows how the main budgets used in a manufacturing business fit together and how the data is used in the cash budget.
This diagram for the sake of clarity, concentrates on issues that are specific to the creation of a cash budget for a manufacturing business. Other data (e.g. disbursements, capital items and financing) also need to be accounted for in the cash budget.