Functional budgets are forecasts for related business functions, like sales, production, material, labor or FOH etc. A budget is quantitative expression of a plan of action, which are prepare in advance of the period to which it relates. Budget set out the cost and revenue that are expected to be incurred or earned in future periods. In short, functional budgets represent a comprehensive expression of management’s plans for future and how these plans are to be accomplished.
Divisions of Budgets
Budgeting is the planning process of business organizations. Overall budgetary process can be divided into two parts:
1. Functional Budgets
2. Master Budget
It usually consists of a number of separate but interdependent budgets. One budget may be necessary before the other can be initiated. Following are different types of budgets:
The sales budget is the starting point in preparing the master budget. A sales budget is a detailed schedule showing the expected sales for the budget period; typically, it is expressed in both amount and units of production.
An accurate sales budget is the key to the entire budgeting in some way. If the sales budget is sloppily done then the rest of the budgeting process is largely a waste of time.
The sales budget is constructed by multiplying the budgeted sales in units by the selling price. The Sales Manager is directly responsible for the preparation and execution of this budget.
Sales Budget = Budgeted United X Budgeted Price
Usually taking into consideration the following organizational and environmental factors while preparing the sales budget.
Example # 1:
Following data are extracted from ABC manufacturing Ltd. You are required to prepare sales budget?
Example # 2:
Estimated sales percentages for the first three-month period of the coming year of the Midland Company:
Estimated unit sales (at Rs. 2 per unit) by district for the three months are:
District Units Sales
Karachi ………. 20,000
Lahore ………. 30,000
Islamabad ……. 10,000
Total …………… 100,000
Requirements: An estimate of sales by units and Rupees for each of the first three months for each district and in total.
Mukharji, A., & Hanif, M. (2003). Financial Accounting (Vol. 1). New Delhi: Tata McGraw-Hill Publishing Co.
Narayanswami, R. (2008). Financial Accounting: A Managerial Perspective. (3rd, Ed.) New Delhi: Prentice Hall of India.
Ramchandran, N., & Kakani, R. K. (2007). Financial Accounting for Management. (2nd, Ed.) New Delhi: Tata McGraw Hill.