FUNCTIONAL BUDGETS

FUNCTIONAL BUDGETS
Budgets for a period are really classified according to the various activities in the organisation. All activities
are interrelated. The forecasts for individual activities are prepared and co-ordinated with those of other
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activities and then consolidated to show the total effect of all the activities as a whole. Approved targets for
individual functions are known as “functional budgets”. The consolidation of all functional budgets is known
as the “Master Budget”. This is nothing but the targeted profit and loss statement and balance sheet of the
organisation.

Principal functional budgets are:
(1.1) Sales Budget: The sales budget is a forecast of total sales, expressed in terms of money and quantity.
The first step in the preparation of the sales budget is to forecast as accurately as possible the sales
anticipated during the budget period. Sales forecasts are influenced by a variety of factors, external as well
as internal. External factors include general business conditions, Government policy, etc. Internal factors
consist of sales-prices, sales trend, new-products, etc. The sales-budget is based on sales forecasting which
is the responsibility of the sales manager and market research staff. The sales budget is regarded as the
keystone of budgeting.
(1.2) Production Budget: The production budget is a forecast of the production for budget period. It is
prepared in two parts, viz.., production value budget for the physical units of the products to be manufactured
and the cost of manufacturing budget detailing the budgeted costs. The main steps involving in the
preparation of a production budget are production planning; consideration of capacity; integration with sales
forecasts, inventory-policies, management’s overall policies. The operation of a production budget results in
various advantages, main being: optimum utilisation of productive resources of the enterprise, production of
goods according to schedule enabling the concern to adhere to delivery dates, proper scheduling of factors
of production.

(1.3) Production Cost Budget: It may be further classified as under:
(1.3.1) Materials Budget: Materials requirement budget, commonly known as materials budget, assist the
purchase department in suitably planning the purchases, fixing the maximum and minimum levels of
materials, components etc. The timing and amount of funds which will be needed to make purchases are
also known with the help of the materials budget.
(1.3.2) Labour Budget: The labour content of each item of production as per the production budget is
determined in terms of grades and trades of the workers required and the labour time for each job, operation
and process. The rates of pay, allowances, bonus, etc., of each category are then considered and labour
cost to be set for each budget centre is calculated by multiplying the wage rate with the labour hours for the
number of units of products budgeted.
(1.3.3) Plant Utilisation Budget: Plant Utilisation Budget is prepared for the estimation of plant capacity to
meet the budgeted production during the budgeted period. It is a forecast of plant capacities available for
fulfilling production requirements as specified in the production budget. This budget is expressed in working
hours or other convenient units.

Followings are the features of Plant Utilisation Budget:
1. It will be base for the requirement of machine for sale and production department.
2. It will provide the base of reasonable depreciation so that machine can be replaced in future.
3. It may be base for the new inventions in the context of plant & machinery.
4. It will indicate the budgeted machine load on departments or machines.
5. It reveals that overloading on some departments, so that sales volume may be increased by
providing after-sales service, advertisement campaign reducing selling price.
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(1.4) Overhead Budget: It may be further classified as under:
(1.4.1) Manufacturing Overhead Budget: The following steps are required to be taken up to prepare the
manufacturing overhead budget:

(i) Classification of expenditure into fixed, variable and semi-variable and collection thereof in
accordance with a schedule of standing order numbers;
(ii) Departmentalisation of expenditure;
(iii) Determining the level of activity for setting the overhead rates; and level of activity may be actual,
budgeted level or normal capacity; and
(iv) Establishing the variable overhead rates per unit of production or productive hour.
(1.4.2) Selling and Distribution Budget: The selling expenses include all items of expenditure on the
promotion, maintenance and distribution of finished products. This budget which is closely related to the
sales budget is the forecast of the cost of selling and distribution, for the budgeted period. Selling and
distribution expenses may be fixed or variable with regard to the volume of sales; separate budgets are
usually established for fixed or variable selling and distribution expenses.
(1.5) Research and Development Budget: This depends mostly on management decisions regarding the
research and development effort – the projects already in hand and the proposed projects.

(1.6) Financial Budget: It may be further classified as under
(1.6.1) Cash Budget: Cash forecast precedes a cash budget. A cash forecast is an estimate showing the
amount of cash which would be available in a future period. This budget usually of two parts giving detailed
estimates of (i) cash receipts and (ii) cash disbursements. Estimates of cash-receipts are prepared on a
monthly basis and depend upon estimated cash-sales, collections from debtors and anticipated receipts from
other sources such as sale of assets, borrowings etc. Estimates of cash disbursements are based on
estimated cash purchases, payment to creditors, employees remuneration, bonus, advances to suppliers,
budgeted capital expenditure for expansion etc.

The main objectives of preparing cash budget are as follows:
(i) The probable cash position as a result of planned operation is indicated and thus the excess or
shortage of cash is known. This helps in arranging short term borrowings in advance to meet the
situations of shortage of cash or making investments in times of cash in excess.
(ii) Cash can be co-ordinated in relation to total working capital, sales investment and debt.
(iii) A sound basis for credit for current control of cash position is established.
(iv) The effect of sudden and seasonal requirements, large stocks, delay in collection of receipts etc. on
the cash position of the organisation is revealed.
A cash budget can be prepared by any of the following methods:
(i) Receipts and payments method
(ii) Adjusted profit and loss account method
(iii) Balance sheet method.
(i) Receipts and Payments Method: In this method the cash receipts from various sources and cash
payments to various agencies are estimated. Delay in cash receipts and lag in payments are taken into  account for making estimates. Since this method is based on the concept of cash accounting, accruals and
adjustments obviously cannot find place in the preparation of cash budgets. The opening balance of cash of
a period and the estimated cash receipts are added and from this, the total of estimated cash payments are
deducted to find out the closing balance.