Budgets can be classified as follows
Functional budgets
- Sales budget
- Production budget
- Material usage budget
- Material purchase budget
- Labour cost budget
- Cash budget
Sales budget
This is a forecast of sales in a given period both in quantity and in value.
Production Budgets
This is an estimate of the quantity of goods that must be produced during the budget period so as to satisfy the budgeted sales and the desired stock levels of finished goods.
- Estimated sales quantity.
- Estimates opening stock of finished goods in units.
- Desired closing stock of finished goods in units.
- Available physical resources e.g. raw materials.
- Management policy.
Materials usage budgets
This represents the quantity of material required to produce the units in the production budget.
Material purchases budgets.
This is the quantity of materials to be purchased so as to satisfy the material usage budget after adjusting for the opening and closing stocks of raw materials.
Labour cost budgets.
This is the budgeted cost of direct labour required to satisfy budget production quantity. It is determined by multiplying the total direct labour hours by the labour rate per hour.
Cash budgets.
This is a forecast of the cash position of a business for a given period and represents cash receipts and payments and also the estimated cash balance at the end of each month of the budget period. Importance of cash budget
- It ensures that sufficient cash is available to meet the requirements of the business.
- It reveals any expected shortage of cash so as to enable the management to arrange for any overdraft.
- It reveals any expected surplus of cash available for investment outside the
business.
Master budget
This is the total budget package for an organization. It is the end product of the budget preparation process. It is therefore a summary budget which incorporates its component functional budgets and which is finally approved, adopted and employed. When all the functional budgets are prepared, they can be summarized to produce budgeted profit and loss account and budgeted balance sheet. The budgeted cash flow statement may also be included.
Fixed/static & flexible budget
A fixed budget is a budget which is drawn to remain unchanged irrespective of the production and sales volume actually realized. It is a static budget which doesn’t adjust itself to the actual activity level.
A flexible budget on the other hand is draw to adjust to the actual sales and production quantities. In some sense it can be considered to be a revised budget for actual activity realized.
