(i) On the basis of Functions
A functional budget is a budget of income and/ or expenditure applicable to a particular function. These budgets are classified according to the functions performed. A function may refer to a process to which a cost centre has been allocated with.
The classifications are as follows:
Functional budgets include: o Sales Budget, prepared by Sales Manager o Selling and Distribution Cost Budget, prepared by Sales Manager o Production Budget, prepared by Production Manager o Production Cost Budget, prepared by Production Manager o Personnel Budget, prepared by Personnel Manager o Purchasing Budget, prepared by Purchases Manager o Plant Utilization Budget, prepared by Production Manager o Capital Expenditure Budget,
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This is the forecast of quantity and amount of sales to be achieved in a budget period. A sales forecast may be a mere presumption of sales without information derived from past performance or considering any relevant information. On the other hand, the sales budget is not mere estimate; it is prepared based on the plant capacity, availability of material, labour and working capital and many other factors.
Selling and Distribution Cost Budget
Selling expenses include the expenses incurred in effecting increase in sales. It includes expenses viz salaries of salesmen, commission, administration costs incurred to manufacture the product. Distribution expenses include expenses relating to marketing products, transportation, freight charges, warehousing costs and the like. Selling and Distribution budget is a supplementary budget to Sales Budget.
Production Budget:
Production budget is a forecast, prepared by Production Manager, of the total output of the whole organisation broken down into individual estimates of output of each type of product with a scheduling of operations (by weeks and month) to be performed and a forecast of the closing finished stock. Production Budget is a forecast of the quantity of goods to be produced during the budget period. It is the initial process in budgeting activities on manufacturing. It may be expressed in terms of Units or Standard
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It budgets the expected expenditure on fixed assets during the budgeted period. Capital expenditure forecasting is a continuous process and by nature it is a long-term function. Capital forecasts should be made for a continuous period than for a year. Along with the long-term forecast, there should also be a short-term forecast. It is also essential that the capital expenditure budget be properly co-ordinated with all the operational budgets of the concern so as to form an integral part of the overall plan.
Administration Cost Budget
This Budget will show the total estimated cost of formulating the policy, directing the organization and controlling the operations of an undertaking which is not related directly to a research, development, production, distribution or selling activity or function. Most of the expenses relating to administration will be of fixed in nature within defined limits and, therefore, the preparation of this budget is relatively easy as compared to other functional budgets. Formally, each budget centre or department will prepare its own budget which will be afterwards incorporated in the administration Cost
Capital Budgeting encourages managers to accurately manage and control their capital expenditure. By providing powerful reporting and analysis, managers can take control of their budgets.
When a company purchases raw materials it will be recorded in Raw Material inventory. Once the raw materials are used, their costs are transferred to the Work in Process inventory account as direct material. Moreover, direct labor and overhead costs are also charged to the Work in Process inventory (http://novellaqalive2.mhhe.com/sites/0073379417/student_view0/ebook/chapter2/chbody3/product_cost_flows.html). As the process of a production is complete, the goods are transferred to the Finished Goods inventory, and then the finished products are sold. Once the products are sold, the costs are transferred to the Cost of Goods
As the company investment is based on the profit generated in last year’s so the budget of the project will be defined after annual report is published which define the annual revenue of this company.
The purpose of a capital budget is for nonrecurring items. Capital expenditures involve long- term plans and goals. To project capital expenditures some course of action should take place which includes: new information, microeconomic factors, macroeconomic factors, and the time value of money.
Budgets has been widely used by a lot of organizations since it was first introduced, because it can helps managers to properly plan and control the business’s resources. Successful control mechanisms as Schick believes are the essential to budgetary development (Gray, Jenkins, and Segsworth, 2002, p.11). However, recently the use of budgets to control organizations has been the subject to criticise and debate (Hansen et al., 2003 cited in Libby and Lindsay, 2010). In this era that full of unpredictable environments has make it even harder for a business to achieve the targets set in the budgets. In fact, European surveys also reported that there has been a growing dissatisfaction among organizations about their budgeting system (Neely et al.,
Budgetary planning may differ between organizations. Single-period budgets and rolling budgets have methodologies that provide advantages and disadvantages that may make one budget time frame better than another. A single-period may require less time in planning during a fiscal year, but is less accurate than a rolling budget that is continuously planned on a repetitive basis. In either case, budgets are planned in advance in order for a company to operate profitably, and less so to have "actual results equal budgeted results." (p. 496)
These words are parallel to the generic principles of budgeting. It calls for a need to forecast the resources required to deliver the services offered by an organization. A budget is a financial plan that includes estimated expenses as well as income for a period of time. In particular, a nursing budget is a systematic plan that is informed by nurse administrators of nursing revenues and expenses. It projects how revenues will meet expenses and projects a return on equity or profit.
Provides advice, assistance, and guidance on budgeting and related information to program managers and budget-related personnel in subordinate organizations. Conducts analyses, reviews, and special studies of budget and/or related information.
Forecasting demand is not an easy task. The market is constantly changing and it makes the product demand difficult to predict. Therefore, there is not such as perfect product forecast of what customers will need in the future. However, there are several methods that help attenuating the uncertainty of forecasting demand. Since, the forecast methods or techniques differ from one another; the objective is to compare and contrast several forecasting methods, and how they are used by organizations to the best advantage under conditions of uncertainty.
A budgetary estimate is used to allocate money into an organization's budget. Many organizations develop budgets at least two years into the future. Budgetary estimates are made one to two years prior to the software project completion. The accuracy of budgetary estimates is typically ten percent below to twenty-five percent above the actual final cost of the project.
Capital budgeting is one of the primary activities of a company. Most of the company uses capital budgeting for decision making process of selecting and evaluating long-term investment. The company have to make a right decision with respect to investment in fixed asset such as purchasing of new equipment and delivery vehicles, constructing additions to buildings and many more. The decision must be right because of the project involve huge amount of cash outflow and it is committed for many years.
As such, there is material cost regulator, manufacturing control, labor cost regulator, excellence control and so on. Conversely, control over the price is implemented through the methods of financial control and typical costing (Meigs, 1998). The control methods aid the management in understanding the operating competence of a firm. Cost accounting also determines the selling price. The intention of all business firms is minimizing costs and maximizing profits. The costs incurred in producing goods and services may be reduced through incorporating alternate but cheaper resources of
One of the most important steps in the capital budgeting cycle is working out if the benefits of investing large capital sums outweigh the costs of these investments. The range of methods that business organisations use can be categorised in one of two ways: traditional methods and discounted cash flow techniques.
Every government entity has a primary goal, which is to be as efficient and effective as possible while expending the smallest amount of resources. In addition, the resources expended cannot be more than the resources received as revenues. The budgeting process is a tool that assists government entities in being both efficient and effective. Before a budget can be adequately prepared, you must first understand the budgeting concept and secondly be knowledgeable of budget types.
It requires an adequate and sound organizational structure, that is, there must be a definite assignment of responsibility for each function of the enterprise. Budgeting compels all the members of management, from the top to bottom to participate in the establishment of goals and plans. Budgeting compels departmental managers to make plans in harmony with the other departments and of the entire enterprise. Budgeting helps the management to put down in figures what is necessary for a satisfactory performance. Budgeting helps the management to plan for the most economical use of labor, material and capital. Budgeting tends to remove the cloud of uncertainty that exists in many organizations, especially among lower levels of management, relative to basic policies and objectives. Budgeting promotes an understanding among members of management of their co-workers' problems. Budgeting force management to give adequate attention to the effects of general business conditions. Budgeting aids in obtaining bank credit as banks commonly require a projection of future operations and cash flows to support