Everything you need to know about types of budget. Budgets are prepared for every business function such as sales, production, purchases, personnel, finance, etc.
As such, they are called functional budgets. In fact, every department of a business concern is expected to perform a particular function.
Budgeting is a comprehensive exercise. It extends throughout the organisation. As such, there are many kinds of budgets. According to functions they serve, budgets are classified into operating budgets, financial budgets, capital budgets, and research and development budgets. On the basis of two major operations of a business, there are selling and production budgets.
The types of budget in cost accounting are as follows:-
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1. Sales Budget 2. Production Budget 3. Production Cost Budget 4. Purchase Budget 5. Plant Utilisation Budget 6. Capital Expenditure Budget
7. Research and Development Costs Budget 8. Cash Budget 9. Master Budget 10. Fixed and Flexible Budget 11. Labour Cost Budget 12. Materials Purchase Budget
13. Factory Overhead Budget 14. Cost of Goods Sold Budget 15. Administration Cost Budget 16. Selling and Distribution Cost Budget 17. Research and Development Cost Budget and a Few Others.
Types of Budget in Cost Accounting: Sales Budget, Production Budget, Production Cost Budget, Purchase Budget and a Few Others
Types of Budget in Cost Accounting – Top 10 Types: Sales Budget, Production Budget, Production Cost Budget and a Few Others
Budgeting is a comprehensive exercise. It extends throughout the organisation. As such, there are many kinds of budgets. According to functions they serve, budgets are classified into operating budgets, financial budgets, capital budgets, and research and development budgets. On the basis of two major operations of a business, there are selling and production budgets.
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These sub-functions have sub-functions of their own. Production budget, for instance, will necessitate budgets for the three cost elements of raw materials, direct labour, and indirect manufacturing expenses (i.e., overheads). Other subdivisions could also be made.
Types of budgets are discussed below:
Type # 1. Sales Budget:
Many of the other budgets are based on the sales budget. It is taken to be the critical starting point to which all other budgets are adjusted. Its preparation begins with the prediction of units of each product that will be sold at specific prices. The work starts with the examination of sales analysis for the current year.
The details required are unit sales by product lines, sales expected in each area or country, sales for each month, sales to customers or through agents. Policy decisions as to increase production facilities or expand plant capacity are taken into account. There may be changes in prices. A forecast may have to be made of business conditions in general, including changes in population or in the income available to consumers.
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A close sales forecast is not that easy. A sales volume within plus or minus 10% is considered reasonable. For correctly predicting sales, numerous qualitative and quantitative techniques have been employed.
Type # 2. Production Budget:
The production budget shows the estimates of production planned for the immediate future period. The production budget should indicate, apart from other things, targets of production for each product, each department and by each month. Generally, the production budget is based on the sales budget.
The responsibility for the overall production budget lies with Works Manager and that of departmental production budgets with departmental works managers. A properly operated production budget leads to better inventory control, improved maintenance of production schedules and production targets, better coordination between production and demand for the product, decreased cost and increased profit.
The production budget is prepared into two parts, namely:
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i. Production volume budget- It shows the physical units of the product to be manufactured; and
ii. Cost of production or manufacturing cost budget- It gives details of the budgeted cost under material, labour and factory overheads.
The following steps are involved in the preparation of production budget:
i. Production Planning – Production planning plays very important part in the preparation of production budget. Production planning on sound lines takes into consideration optimum utilisation of plant capacity by elimination or reduction of limiting factors and both bottlenecks in production like shortage of material, labour etc. Proper planning of production levels out seasonal fluctuations of sales so that optimum inventory of finished goods, components and work-in-progress is maintained.
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ii. Consideration of Plant Capacity – The total quantities of each of the products or group of products which the firm is capable of producing is determined. This requires coordination of production budget with plant utilization budget.
iii. Co-ordination with the Sales Budget – Proper coordination between production and sales budget is necessary to avoid imbalances of sales and production.
iv. Inventory Policy Considerations – The extent to which inventory of finished goods is to be carried depends upon several factors such as future sales potential, availability of storage facilities, the risk and cost of stock-out and cost of carrying inventory.
The budgeted quantity of production is computed as follows:
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Units to be produced = Desired closing stock of finished goods + Budgeted sales – Opening stock of finished goods.
v. Policy of the Management – Management policy as to whether certain components or parts should be produced or procured from outside should also be taken before finally setting the budget.
Type # 3. Production Cost Budget:
This is the quantity of products to be manufactured expressed in terms of cost. Basically, there are three element of cost, namely, direct material, direct labour and overheads. Separate budgets for each of these elements have to be prepared.
i. Direct Materials Budget:
Standard costing greatly facilitates the preparation of a materials budget. When standard cost records are not available, the details have to be adjusted to the period when manufacture takes place. Materials are controlled on the basis of price and usage after allowing for normal wastage. Technical experts decide on the best and most economical material to use for each purpose.
A similar procedure to the above applies to direct labour. The hours shown in the production budget are used with the wage rates which are likely to apply during the period of production. Wages are controlled according to the rates paid and the efficiency of the operator.
In order to control the labour costs, the planning department has to establish standards by listing the operations, indicating the tools and equipment needed, stating the grade of employees, and setting the standard operation time in standard direct labour hours.
Overheads budget has to be assembled from a large amount of detailed information from past records. It has to be updated to allow for changes in future costs and related activity. It is compiled on the basis of department overhead expense budgets and cost centre budgets. The overheads may relate to factory, general administration, selling and distribution functions. Accordingly, separate budgets are prepared for factory overheads, administrative overheads and selling and distribution overheads.
a. Factory Overheads Budget:
This includes indirect material, indirect labour and indirect expenses connected with the factory.
Ordinarily, the factory overhead costs are given close attention due to their diversity and potentiality of cost saving. Individual cost items are examined carefully to see how the cost react to change in volume or in relationship to other factors. Past records may show that a cost will generally follow a certain pattern of increase or decrease in response to a change in some other cost or activity. Certain overhead costs may be influenced by indirect labour hours, others by direct labour hours or machine hours.
b. Administrative Overheads Budget:
The administrative expenses include items of expenditure relating to managerial functions of planning, coordination and control as well as expenses of the legal, financial, accounting and other service departments. The budgeted expenses are determined on the basis of amount spent in past years and the minimum requirements for the efficient operations of each department. By and large, administrative overheads tend to remain fixed.
c. Selling and Distribution Overheads Budget:
The selling expenses include all items of expenditure on the promotion, maintenance and distribution of finished products. Sales office rent, salaries, depreciation and other miscellaneous expenses are provided for as a fixed amount per month. Advertising, selling commission, bad debts, travelling and delivery expenses are provided for as a percentage of budgeted sales.
Although selling expenses are not included as a part of product cost, these are frequently analysed by lines of product, sales territories, customers, salesmen or some such unit basis. Such an analysis of selling expenses can be applied in planning sales activity. Besides, if selling costs are budgeted and computed on a unit responsibility basis (products, territories, type of salesmen, customers etc.), it may be possible to identify differences by sales territories, salesmen, customer group etc.
Thus, selling costs, like manufacturing costs, can be identified by area of responsibility and can be used as a means for control. The selling and distribution overheads budget is closely linked with the sales budget and should be prepared simultaneously with the sales budget. The sales manager, advertising manager and sales office manager will cooperate with the budget officer in the preparation of this budget.
Type # 4. Purchase Budget:
The purchase budget states the purchases which must be made to achieve the complete budget plan. These include the requirements of direct and indirect material, and of purchased services as set out in the sales, production cost, capital expenditure and research and development budgets adjusted in respect of-
(i) Inventory policy of the firm,
(ii) Purchase orders already placed,
(iii) Materials to be manufactured within the business as distinct from those to be purchased from outside.
Type # 5. Plant Utilisation Budget:
This budget is concerned with the facilities available to carry out the production programme. It shows the load of individual machines or other groups of machines in different departments. It also discloses which machines or departments are overloaded so that steps are taken to work overtime, begin shift-working, transfer work to sub-contractors or other departments.
Type # 6. Capital Expenditure Budget:
Capital budgeting refers to the purchase of durable, fixed assets. It is a long-term budget, usually set for three to five years. The budget requires frequent revision because of changes in cost of land, buildings, machinery and equipment. It gives an indication of the cash requirements. If financial resources are not available within the company, arrangements have to be made to raise them from outside.
Type # 7. Research and Development Costs Budget:
These budgets are difficult to prepare since there is no end-product against which to measure efficiency.
It becomes a question of deciding how much of the profits can be set aside for the purpose in mind, and then of sub-dividing this amount between:
(i) New products research.
(ii) Improvement of existing products.
(iii) Developing new and improved products to the point of introduction in the market.
Type # 8. Cash Budget:
The cash budget is a summary of the firm’s expected cash inflows and outflows over a particular period of time. In other words, cash budget involves a projection of future cash receipts and cash disbursements over various time intervals. There must be a balance between cash and the cash demanding activities/operations, capital expenditure and so on. Very often, the need for additional cash is not realised until the situation becomes critical.
The cash budget consists of two parts:
i. The projected cash receipts (inflows) and;
ii. The planned cash disbursements (outflows).
Cash receipts include collection from debtors, cash sales, dividends received, sale of assets, loans received and issues of shares and debentures. Payments include wages and salaries, payment to creditors and suppliers, rent and rates, taxes, capital expenditure, dividend payable, commission payable and repayment of loans and debentures.
Type # 9. Master Budget:
A master budget is a master plan for the entire firm. It is the summary of final plan for the forthcoming year. When all detailed functional budgets have been completed, they are integrated into a master budget. According to the Chartered Institute of Management Accounts, London, Terminology, a master budget is defined as “The summary budget which is finally approved, adopted and employed”.
It may happen sometimes that a number of master budgets have to be prepared before the final one is agreed upon. The master budget becomes a governing document for the operation of the business. It virtually takes the form of a forecasted profit and loss account and a forecasted balance sheet for the next year.
Type # 10. Fixed and Flexible Budgeting:
In the real world, one seldom finds stable operating conditions. Future can never be predicted with certainty. A fixed or static budget is satisfactory only when a company’s activities can be estimated within close limits. According to The Chartered Institute of Management Accountants, London, Terminology, a fixed budget is defined as a “budget designed to remain unchanged irrespective of the level of activity actually attained”.
Such a static budget prepared for a single level of activity is of limited value for planning and control. Accordingly, it has been a common practice in many concerns where sales and production cannot be forecast accurately to abandon the concept of fixed budget. These cannot be adjusted automatically with volume changes. It is better to substitute them with a program of flexible budgets.
In practice, budgeting means flexible budgeting. A flexible budget, as also called a variable budget, step budget, sliding-scale budget, expense-formula budget and expense control budget. It is a budget which permits revision of estimates of operating cost and profits with changes in sales or production volumes.
According to the Chartered Institute of Management Accountants, London, Terminology, a flexible budget is defined as- “a budget which by recognising the difference between fixed, semi-variable and variable cost is designed to change as volume of output changes”. Under flexible budgeting, budgets are drawn for a series of possible sales and production volumes, including the actual.
In the beginning of the period, budgets are constructed for a number of alternative production volumes to take care of the changing market conditions and government policies. ‘Instead of making a point estimate for a single most likely outcome, schedules of costs and revenues are made for a range of possible outcomes.
Usually flexible budgets are prepared for minimum of three activity levels- the most optimistic, the most pessimistic, and the most likely. The point to be remembered is that in addition to different budgets, a fresh budget is again drawn for the attained level of activity.
It is with reference to the figures in this new budget that comparisons are made between the planned and the actual. On that basis variances are calculated and corrective action taken. It would be weak analysis to use a profit plan (budget) based on a level of activity that differs from the actual level of activity.
Types of Budget in Cost Accounting – 8 Main Types: Sales Budget, Production Budget, Purchase Budget, Labour Cost Budget, Cash Budget, Fixed Budget and a Few Others
Following are the budgets that comes under the above categories:
1. Sales Budget
2. Production Budget
3. Purchase Budget
4. Labour Cost Budget
5. Cash Budget
6. Fixed Budget
7. Flexible Budget
8. Master Budget
1. Sales Budget:
Sales Budget is one of the important functional budgets. Sales is perhaps the most difficult forecast and the success of this budget depends upon the accuracy of the entire budget system. It is concerned with forecasting of what company can expect to sell during the budget period. A Sales Budget shows what products will be sold in what quantities and at what prices. It is usually the responsibility of the sales manager to prepare the budgets through proper market research with his team.
The expected sales are normally expressed in quantitative terms i.e., in physical units and in monetary value. The sales manager has to keep in mind various factors which influences the preparation of sales budget. Those factors could be market demand, production capacity, past sales, market research, pricing policy, seasonal variation, sales promotion techniques, reports of sales personnel, market conditions etc. Taking into account the above factors, the sales manager has to prepare a sales budget.
2. Production Budget:
A Production Budget will be prepared after the preparation of sales budget and desired inventory levels. Production budget shows a number of units that must be produced during the budget period to meet the market demand. Here it is necessary to take in to account the opening and the closing stock of finished goods and sales volume in order to find out the number of units to be produced. Again the factors like sales forecast, management policy relating to the budgeted stock requirements, plant capacity etc., should be taken into account.
3. Purchase Budget:
A Purchase Budget is prepared to determine the different inputs required to carry out the production activities. Sometimes it includes the purchase of raw materials while other times it may be purchase of direct and indirect materials, fixed assets etc. The object of preparing a purchase budget is to formulate a plan which will allow all necessary materials and other items to be purchased at a minimum cost.
A purchase manager has to take into account the factors such as inventory levels, economic order quantity, expected changes in price of raw material storage facilities availability of raw material etc. while preparing a purchase budget.
4. Labour Cost Budget:
It is an estimate of labour requirements to meet the demands of the company during the budget period. While preparing labour cost budget, factors like increase in wages, types of labour required training etc. are to be considered. It enables the personal department to plan well for the requirements of all the departments concerned.
5. Cash Budget:
A Cash budget represents the amount of cash receipts and payments and the balance during the budgeted period. It is prepared after the preparation of all functional budgets. It is prepared to know estimated cash receipts and estimated cash disbursements of the company over the budget period and to know the cash position. It is a device for coordinating and controlling the financial side of the business to ensure the solvency and financing required to cover up any deficiency in cash.
6. Fixed Budget:
A Fixed budget is prepared for a particular activity to present the cost details. This type of budget is not of much help to the management as no adjustment is made to the cost for the difference in the level of activity.
7. Flexible Budget:
A flexible budget is one, which is designed to change in accordance with the level of activities actually attained. The figures used in this type of budget are made adaptable to any given set of operating conditions. Flexible budget is more elastic, useful and practical. They are based on a clear distinction between fixed and variable cost. It can be said that in order to avoid wide discrepancies, which may arise when comparisons of actual results are made with fixed budget, the use of flexible budget is to be recommended.
8. Master Budget:
A master budget is an overall plan of future operations. It is a comprehensive framework for the coming year. It gathers together all the budgets of various departments and makes a summary of them. It is prepared in two parts namely forecast income where principal items of revenue expenses, loss and profits are shown and forecast balance sheet where the items like fixed assets, current assets, total capital employed and liabilities are shown.
It is an outlay showing the proposed activity and anticipated financial results during the budgeted year. It is presented before the board of directors for adoption and approval. After its approval, various functional budgets are sent to the concerned departments to plan their working according to their budgets.
Types of Budget in Cost Accounting – Sales Budget, Production Budget, Materials Purchase Budget, Labour Budget, Factory Overhead Budget and a Few Others
Budgets are prepared for every business function such as sales, production, purchases, personnel, finance, etc. As such, they are called functional budgets. In fact, every department of a business concern is expected to perform a particular function. Naturally, therefore, the functional budgets are the same as departmental budgets.
Even the CIMA Official Terminology does not distinguish between departmental budgets and functional budgets. It defines a functional budget as “a budget of income and/or expenditure applicable to a particular function. A function may refer to a department or a process.
Functional budgets frequently include:
i. Production cost budget (based on a forecast of production and plant utilisation);
ii. Marketing cost budget, sales budget;
iii. Personnel budget;
iv. Purchasing budget;
v. Research and development budget.”
The Terminology thus defines a functional budget and also specifies them as above.
In the case of an enterprise operating a comprehensive budgetary control system, the following will be the functional budgets:
Type # 1. Sales Budget:
The sales budget is based on sales forecast. In fact, the sales forecast itself becomes the sales budget if it is presented in money value. The sales budget shows the quantity of each product that the concern plans to sell as well as the intended selling price also. It is thus a forecast of what the concern can reasonably be expected to sell both in quantity and value during the budget period. It predicts total revenue and also supplies the basic data for preparing the expenses budgets. It is therefore, the foundation of all other budgets.
Type # 2. Production Budget:
The production budget is prepared after the sales budget. This budget is essentially the sales budget adjusted for inventory changes. It is prepared by the production manager. It indicates the quantity of products to be produced during the budget period. The objective is to ensure that production is sufficient to meet sales demand and also to maintain economic stock levels.
The production budget determines the level of activity of the business. It facilitates planning of production so as to produce at maximum efficiency. This budget may be prepared on the basis of products or on the basis of periods or plants.
Type # 3. Materials Purchase Budget:
This budget shows the estimated quantity and cost of materials required for producing the quantity specified in the production budget. In order to prepare this budget, it is necessary to estimate the different types of direct material quantity and the price of each type.
The materials budget is, sometimes, prepared in two parts. The first part is known as the material requirement or usage budget. This part gives information about the quantity of each type of direct material required to meet the production requirements as per the production budget.
For its preparation, it is also necessary to know unit material utilisation rate. This rate is used to multiply the quantity of finished goods as per production budget in order to know the total usage of each type. Total usage multiplied by the price per unit of material gives us the material usage cost.
The second part of the materials budget is the material procurement budget. This part gives information about materials to be purchased during the budget period. It starts with the budgeted requirement of materials as laid down in the requirements budget and provides for purchases to be made to achieve the entire budget plan.
Type # 4. Labour Budget:
Also known as the Personnel Budget, the labour budget is a forecast of requirements of labour during the budget period, for achieving the production requirements-as per the production budget.
For preparing the labour cost budget, it is, first of all, necessary to ascertain the labour time required to meet the planned production. Labour hours are usually estimated by time and motion study engineers. In case different grades of labour are required, it is necessary to show the labour time of each grade separately in the budget. Labour hours estimated is multiplied by the wage rate per hour in order to get the labour cost.
Type # 5. Factory Overhead Budget:
Factory overhead or manufacturing overhead budget shows the estimated manufacturing expenses to be incurred during the budget period. Factory overhead, as we know, comprises indirect materials, indirect labour and indirect factory expenses. These items of overhead may be classified under the category fixed and variable. They may also, sometimes, be classified as controllable and uncontrollable items.
For purposes of grouping the items of production overhead, into fixed, variable and semi-variable, it is necessary to study very carefully, the behaviour of the various items. This budget is prepared by the production department managers. The budget is very useful for computing the pre-determined recovery rates.
Type # 6. Plant Utilisation Budget:
This budget represents plant and machinery required to meet the budgeted production during the budget period. Plant capacity will be expressed in the budget in terms of convenient units such as working hours or weight or the number of products.
This budget shows the budgeted machine load in each department. It focuses attention on over-loading so that action can be taken in time for such alternatives as shift working, overtime working, sub-contracting, purchase of new machinery, etc. Similarly, where under-loading is expected, the sales manager can be requested to increase the sales volume of certain products by reduction in prices, discounts, change in the mode of packing, advertising, etc.
Plant utilisation budget thus ensures effective utilisation of production capacity of a concern.
Type # 7. Production Cost Budget:
This budget is also known as the manufacturing cost budget. It is a forecast of cost of production as per production budget. It expresses physical quantities of production budget in terms of money. The physical quantities are broken down into materials, labour and factory overhead.
It is thus based upon the production budget, materials budget, labour budget and manufacturing overhead budgets. It shows the total cost as well as unit cost of each of these elements.
Type # 8. Cost of Goods Sold Budget:
This budget shows the forecast of cost of goods sold during the budget period. It may be prepared for each product produced and sold by the concern. Alternatively, instead of product-wise budget, it may take the form of a consolidated budget for all the products of the concern.
This budget shows for each product, the cost of each element such as direct materials, direct labour, direct expenses and factory overhead. Opening stock of finished goods is added to the total and closing stock is deducted therefrom. The resultant figure will be the cost of goods sold.
Type # 9. Administration Cost Budget:
The administration cost budget represents the estimated cost of formulating policy, directing the organisation and controlling the operations of an undertaking. A majority of the items of cost relating to this budget are fixed in the short-run. Hence, the preparation of the budget does not present much difficulty.
Type # 10. Selling and Distribution Cost Budget:
This budget shows the estimated cost of promoting sales and retaining custom for the budget period.
This budget is closely associated with the sales budget. In order to achieve the targets laid down in the sales budget, it is necessary to plan the selling campaign. While doing so, forecasting of expenses likely to be incurred becomes necessary. These expenses constitute the selling and distribution costs to be incurred in connection with selling activities for achieving sales targets.
This budget is thus, a forecast of the expenses connected with selling and distributing the product of a concern during the budget period. The budget being related to the same budget center, it is the responsibility of the sales manager to prepare it. The selling and distribution expenses are policy costs.
This is because of the reason that the amount that a concern is prepared to spend depends upon factors such as the nature of the product, extent of competition, market share to be achieved, etc. As such, the expenses to be budgeted should be based upon the actual past sales, but adjusted to changes in the policy of the concern with regard to sales promotion.
While preparing this budget, it is usual to group the various expenses element- wise under such heads as direct selling expenses, sales office expenses, distribution expenses, advertising expenses, etc.
Type # 11. Research and Development Cost Budget:
In the case of this budget, efficiency or otherwise cannot be measured in the absence of any final product. The management has, therefore, to specify a certain amount to be spent on research and development as a matter of policy.
Research and Development costs include payment to outside research organisations, salaries of research staff, cost of equipment required for research, cost of test runs, pilot schemes, etc. Development function begins when research yields definite benefit to the concern. In practice, however, it is difficult to distinguish between research and development. As such, costs of both these are normally put together in the same budget.
Type # 12. Capital Expenditure Budget:
This budget represents planned outlay on fixed assets during the budget period. It is prepared for a long period of five or ten years. It is based on information regarding – (i) overloading as indicated by plant utilisation budget, (ii) future development plans to increase output by buying new and improved equipment, and (iii) replacement requests by the various departments.
Type # 13. The Cash Budget:
This budget is also known as the Financial Budget. It is the most important functional budget. The CIMA Official Terminology defines a cash budget as “a detailed budget of cash inflows and outflows incorporating both revenue and capital items.”
The cash budget is prepared on the basis of the cash forecast. The cash forecast is an estimate showing the availability or otherwise of adequate amount of cash in a future period for meeting the operating expenses and all other commitments. This budget summarises the anticipated cash receipts and cash payments for the budget period. It indicates the availability of sufficient cash to meet the needs of business during the budget period. In case of inadequate cash, it also shows how the deficiency is to be met.
It is the purpose, therefore, of the cash budget to give advance warning of those months in the year when a deficiency of cash is most likely to occur. If sufficient warning is given, necessary funds can be made available by borrowing from bank or obtaining requisite finance from some other sources.
In the same way, advance notice of a situation in which surplus cash exists may enable management to make suitable prior arrangement for investment outside the business.
Types of Budget in Cost Accounting – 6 Common Types: Basic Budget, Current Budget, Fixed Budget, Flexible Budget, Master Budget and Functional Budget
1. Basic Budget:
This budget is based on a long term plan and current budgets are prepared on its basis. It may be fixed or flexible. It has wider scope and is less detailed than a current budget. The basic data are not updated when there are revisions of pay scales or changes in the price of materials. Thus, the use of basic budget obscures operating variances. Hence these budgets are not suitable for control purposes.
2. Current Budget:
This budget is prepared for use over a short period of time, i.e., one year or less, and is related to current conditions. These budgets highlight operating variances. It minimises variances due to changed conditions. It is suitable for control purposes.
3. Fixed Budget:
This budget remains fixed over a given period. It is not altered with the change in the volume of production or activity level attained. Such a budget is usually prepared for expenses of a fixed nature. This budget is prepared on the basis of an estimated volume of production and sales and no plans for adjustment are made for the difference of the actual volume of production and sales from the budgeted figures. This budget is misleading and unsuitable for control purposes. Hence, it has limited practical application. It does not highlight activity variance.
4. Flexible Budget:
According to CIMA – “Flexible budget is a budget which is designed to change as volume of output changes by recognising different cost behaviour pattern.” It is also called sliding scale budget. Flexible budgets are schedules of costs or expenses which show how each cost or expense should vary with variations in the volume of activities.
This budget recognises fixed, semi-fixed and variable costs. Fixed or period costs do not change with the volume or production, activity within a reasonable limit, but accrue with passage of time. Volume or product costs vary in proportion to the volume of activity. Semi-fixed costs are partly fixed and partly variable. Flexible budgets are more realistic, practical and useful.
5. Master Budget:
It is a consolidated summary of different functional budgets prepared by functional departments. The summary of all the functional budgets forms two budgets, viz., budgeted profit and loss statement (operating budget) and budgeted balance sheet (financial budget). These two budgets together form the ‘Master Budget’.
It generally contains details of production, sales, stocks, debtors, fixed assets, cash position, important control ratios, etc. It shows the overall plan of the business for the next period. It is usually prepared by the budget director or budget officer. It must be approved by the budget committee and then by the ‘Board of Directors’. After its final approval it becomes the target of the company during the budget period.
6. Functional Budget:
It is a budget of income or expenditure appropriate to, or the responsibility of, a particular function. There are various types of functional budgets depending on the nature, size and policy of the concern.
Those budgets which are frequently prepared include:
(1) Sales budget
(2) Selling and distribution cost budget
(3) Production budget
(4) Materials budget
(5) Labour budget
(6) Purchasing budget
(7) Production cost budget
(8) Production overhead budget
(9) Plant utilisation budget
(10) Maintenance cost budget
(11) Capital expenditure budget
(12) Research and development cost budget
(13) Administration overhead budget
(14) Cash budget
(15) Working capital budget.
Using the above functional budgets a summary budget is prepared, leading to the preparation of the budgeted profit and loss statement and the budgeted balance sheet. The summary budget after review is accepted as master budget. Thus, functional budgets are subsidiary budgets of the master budget.
a. Sales Budget:
It is the most important functional budget. If the sales figures are wrong it will affect all functional budgets as well as master budget, since these are based on it. It forecasts the quantities and values of each product the company can reasonably expect to sell to its customers during the budget period. The sales budget may be prepared according to products, sales territories, types of customers, salesmen, periods (i.e., month, quarter, week), etc.
It is a forecast of the production for the budget period. It is prepared by the Production Manager. It shows the quantities of various products to be produced, the departments which will manufacture them and the time schedule within which the production will be completed. It is prepared in two parts, viz., volume budget for the physical quantities of each product to be produced and the cost of production budget showing details of the budgeted costs under material, labour and factory overhead in respect of each product.
Budgeted production = Budgeted Sales + Closing Stock – Opening Stock.
It is prepared by using the sales budget and the plant and machinery utilization budget.
Production budget is important as it highlights:
(i) The extent of utilization of each machine;
(ii) Inadequate capacity for which extra-shift may be worked, new machinery may be installed or a portion of output may be sub-contracted;
(iii) Idle capacity for which sales department must procure additional sales volume.
Production Cost Budget:
The cost department usually prepares production cost budget for each department or product by using production budget, material budget, labour budget and factory overhead budget. It shows the estimated cost of carrying out the production plans according to the production budget.
It shows the estimated quantities and value of each item of raw materials, components and packing materials required to produce the budgeted output. First the quantities are incorporated in the materials budget and then the cost of each material consumed is obtained by using the price from the purchase budget.
It serves the following purposes:
(i) It helps the purchase department to plan its purchases so that the production is not held up.
(ii) It helps in the preparation of purchase budget.
(iii) It helps to determine maximum and minimum levels of inventory of materials and components.
It generally deals with direct materials only. Indirect materials and supplies are usually included in the overhead cost budget.
It gives details of the purchases to be made during the period to meet the requirements of business. It is usually prepared by the purchase manager. Costs can be reduced by careful planning of purchases.
It shows:
(i) The quantities of each type of raw material, indirect material and other equipments to the purchased;
(ii) When to purchase; and
(iii) The estimated cost of material purchases.
It shows the number of each grade of workmen required to produce the budgeted output, the anticipated labour cost for the budget period and the period of training which would be required for new recruits. The standard direct labour hours of each grade of labour required for each unit of output are determined by time and motion studies.
It is then multiplied by the standard wage rate for each grade of labour to obtain the labour cost per unit of production. Labour cost is classified into direct and indirect for incorporation in variable cost and fixed overheads. It helps personnel department to make recruitment plans, determine cash requirements for payment of wages and control labour cost.
f. Production Overhead Budget:
It shows all the fixed, variable and semi-variable production overhead likely to be incurred during the budget period. Overhead budgets should be prepared for each department of the factory for control purposes. The budgeted overhead costs of service departments are totaled and apportioned to production departments on the basis of services received by them. Finally, the total overheads of production departments are related to production.
g. Selling and Distribution Cost Budget:
This budget is prepared by the sales manager as it is closely concerned with the sales budget. It shows all costs likely to be incurred in selling and distributing the company’s products during the budget period. Expenses which are not directly concerned with the sales budget, e.g., advertising, sales promotion, market research, etc., are determined by the marketing manager and forwarded to the sales manager for incorporation in the budget.
h. Administration Cost Budget:
It shows all administration expenses, e.g., salaries of administrative staff, office lighting, heating, air- condition, car, telephone, stationery, etc. These expenses are mostly of fixed nature and so it is easy to forecast. It helps to control administrative functions of various departments.
i. Capital Expenditure Budget:
It shows the estimated expenditure on all fixed assets during the budget period, e.g., plant and machinery, new buildings, land and intangible items like patents, etc., capital assets required for the production departments are available from plant utilisation budget. Capital assets required for administration and other departments are available from the requisitions of various departments. Since the amount involved in the total capital expenditure budget is very high, it requires approval from top management.
j. Research and Development Cost Budget:
Research and development unit is generally regarded as a budget centre and all costs relating to it, e.g., salaries, wages, lighting, maintenance costs, rent, depreciation of buildings, plant and machinery, etc., should be classified under fixed, variable and semi-variable heads. The research and development manager provides his estimate of expenses on research and development work item wise for approval of top management and inclusion in the budget.
It shows the plant and machinery required to meet the budgeted production during the budget period. Plant capacities/facilities may be expressed in the budget as working hours or weight or no. of products, etc.
Where maintenance of machinery is costly, a maintenance cost budget minimises cost. Preventive or routine maintenance is done to keep the machinery in running condition. Breakdown maintenance is required in case of actual breakdown. A compromise must be made between these two types of breakdown to keep the cost minimum. There must be close cooperation between the maintenance engineer and the budget officer for the preparation of an effective maintenance budget. The cost of preventive maintenance, major breakdown maintenance and others should be shown separately in the maintenance budget.
It is an estimate of cash receipts from all sources and cash payments for all purposes and the net cash balances during the budget period. It ensures that the business has adequate cash to meet its requirements as and when these arise. It indicates cash excesses and shortfalls so that action may be taken in advance to invest any surplus cash or to borrow funds to meet any shortfalls. It is better to break it into monthly and quarterly budgets.
Types of Budget in Cost Accounting – Top 16 Types: Master Budget, Production Budget, Production Cost Budget, Materials Budget and a Few Others
The following are the types of budget in cost accounting:
Type # 1. Master Budget:
It is the summary budget for whole organisation incorporated the summarized figures for various activities. It is the consolidation of all functional budgets.
(Sales) is responsible for preparation of sales budget.
In the estimation of sales the following points are to be considered:
(a) Past sales performance
(b) Information regarding concerned organisation and general business conditions.
(c) Future trend.
(d) Seasonal fluctuations, and
(e) Government’s Control.
Type # 2. Production Budget:
Production budgets are based on sales forecast budgets which includes type of products, manufacturing capacity’s period of production and availability of labour. The production manager also considered the physical facilities like plant, power, space and availability of raw materials.
Type # 3. Production Cost Budget:
The product budget determines the number of units to be produced. When these units are converted into monetary terms it becomes a cost of production budget. The cost of production budget in the total amount to be spent on producing the units stipulated in the production budget. The materials budget and labour budget are two main constitutes of cost of production budget.
Type # 4. Materials Budget:
The material budget is concerned with determination of the quantity of raw materials required for production. It is expensed in terms of physical quantities and values of materials to be required for production purpose. The materials are purchased as per the requirements of production department.
The purpose of raw materials budget is as:
(a) Purchase department will plan the purchase of raw materials at different times.
(b) It will enable the fixation of minimum stock, level, maximum stock level and recording level, and
(c) The budgeted cost of raw materials will be determined.
Type # 5. Labour Budget:
The labour required for production may be classified into three categories, such as – unskilled, semiskilled and skilled. Some labour may be employed for manufacturing are called direct while other cannot be specific with production called indirect labour.
The budget gives derailed information relating to the number of employees rates of wages and cost of labour hours to be employed. It is useful for anticipating labour time required for production and determining the finances required for payment of labour.
Type # 6. Factory over Head Budget:
It contains the details of the fixed and variable overhead costs for the budget period. The fixed costs generally remain fixed and do not change with the change in the volume of production while variable costs change with the change is the volume of production. Fixed costs is estimated on the basis of past experience while variable cost is determined per unit of cost and it is calculated by multiplying the rate per unit by the budgeted output.
Type # 7. Distribution Overhead Budget:
It includes the estimates of all items of expenditure and distribution of finished products. The costs are divided in to fixed, variable and semi variable categories and estimated on the basis of past experience. The various items of expenditure includes sales office rent, salaries, depreciation and miscellaneous expenses like advertising, commission, bad depts. and traveling expenses etc.
Type # 8. Administrative Overhead Budget:
It contains the estimates of administration expenses like expenses on office operating including salaries of office personnel. It is prepared with the help of past experience and expected change in future.
Type # 9. Cash Budget:
The cash budget gives detailed estimates of cash receipts and cash disbursements for the budget period. It is prepared after all the functional budgets are prepared by manager either on a monthly or weekly basis.
It is a forecast of expected cash intake and outlay cash forecasts will include all possible sources from which cash will be received and other channels in which payment are to be made so that consolidated cash positions is determined.
Type # 10. Fixed Budget:
A fixed budget is a budget designed to remain unchanged irrespective of the level of activity actually attained. It does not change with the change in the level of activity. The main purpose of fixed budgeting is to coordinate sectional activities to attain the organisation objectives. Fixed budgets are established only for short period of times when the actual results are not anticipated to differ from the budget estimates. It has only limited application.
Type # 11. Flexible Budget:
A flexible budget is prepared in manner that it gives the budgeted cost for only level of activity. It is more realistic and practical. It is also called variable or sliding scale budget.
Type # 12. Basic Budget:
It has been defined as a budget which is prepared for use unaltered over a long period of time. It does not take in to consideration current conditions and can be attainable under standard conditions.
Type # 13. Current Budget:
It can be defined as a budget which is related to the current conditions and is prepared for use over a short period of time it is more useful than basic budget as the target it lays down will be corrected to current conditions.
Type # 14. Long Period Budget:
A budget which is prepared for periods longer than one year is called long period budget. Capital expenditure budgets and research and development budgets are examples of long period budgets. These budgets help in business forecasting and forward planning.
Type # 15. Short Period Budget:
A budget which is prepared for a period within one year is called shorts period budget. Generally the functional budgets are short period budget. It is very useful to lower levels of management for control purposes.
Type # 16. Zero-Based Budgeting (ZBB):
The system of budgeting that requires managers to justify their entire budget request in detail without considering the previous year amount. It is latest technique of budgeting was first used in 1964 in the US department of agriculture when it prepared zero base budgets as a supplementary exercise to its existing budget.
The former president of America, Jimmy Carter used this technique when he was governor of Georgia for controlling state expenditure. Zero is taken as a base and likely future activities are decided according to the present situations.
According to Peter A. Pyher, “A planning and budgeting process which requires each manager to justify his entire budget request in detail from scratch {hence zero base} and shifts the burden of proof to each manager to justify why he should spend money at all. The approach requires that all activities are analyzed in decision packages which are evaluated by systematic analysis and ranked in order of importance”.