Functional Budgets & their Details

Budgets for a period are classified according to the various activities in the organization. All activities are interrelated. The forecasts for a individual activities are prepared and co-ordinated with those of others activities and then consolidated to show the total effect of all the activities as a whole. Approved targets for individuals functions are known as “functional budgets”. The consolidation of all functional budgets is known as the “master budget”. This is a targeted profit and loss statement and the balance sheet of the organization.

Principal functional budgets are as follows:

  • Sales budget: The sales budget is a forecast of total sales, expressed in terms of money and quantity. The sales budget is based on sales forecasting, which is the responsibility of the sales manager and the market research staff. The sales budget is regarded as the keystone of budgeting.
  • Production budget: The production budget is a forecast of the production for budget period. The operation of a production budget result in various advantages, such as : optimum utilization of productive resources of the enterprise, production of goods according to schedule enabling the concerns to adhere to delivery dates, proper scheduling of factors of production.
  • Materials budget: assist the purchase department in suitably planning the purchase, fixing the maximum and minimum levels of materials, components etc.
  • Direct 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 worker required and the labour time for each job, operation and process.
  • Administration Cost Budget: The administration expenses include items of expenditure relating to higher management functions as well as expenses of the legal , financial , accounting and other services departments. The Budgeted 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.
  • Selling Expenses Budget: The selling expenses include all items of expenditure on the promotion, maintenance and distribution of finished products. Selling of and distribution expenses may be fixed or variables with regard to the volume of sales;   separate budget are usually established for fixed or variable selling and distribution expenses.
  • Cash Budget: Cash forecast precedes a cash budget. Cash forecast is an estimate showing the amount of cash which would be available in the future period. This budget usually of two parts giving detail estimates of (i) cash receipts and (ii) cash disbursements.