Budget Part2

ACCA F5 - Performance Management 

Functional budget relates to cost and revenue of functional area. The functional area can represent cost, revenue or investment center.

Ø  Sales budget: It predicts sales volume for budgeted period and calculates the total sales revenue for that period using adjusted sales price per unit.

Ø  Production budget: Budget production level is calculated based of budget sales level. (i.e. budget production = budgeted sales - opening stock + expected level of closing stock)

o   Raw material budget: It highlights the demand of raw material for budgeted period. As we see in articles related to inventory that raw materials are critical for manufacturing sector, raw material budgeting is important part of manufacturing budget. It can be divided into two parts.

§  Material usage budget: estimates material usage in production of budgeted output level

§  Material purchase budget: estimates purchase required in order to fulfill the gap generated by usage and closing stock required. (Material purchase = Material usage - Opening Inventory + Closing Inventory)

o   Labor budget: Labor budget is estimated labor hour for output during budget period times labor rate per hour.

o   Overhead budget: Overhead budget is estimated overhead for output during budget period multiplied by overhead rate per unit. Different methods (activities, labor hours, machine hours etc) can be adopted to calculate overhead rate per unit.

Ø  General administration expenses budget: Estimates expenses for running organisational units other than production for proper functioning and control of organisations.

Ø  Selling and distribution budget: Estimation of expenses related to promotional events for boosting sales, sales terms, logistics and distribution outlets expenses are included into selling and distribution budget.

Budget financial statements

Ø  Budgeted Income Statement - The income statement which reflects income and expenses streams for budgeted period before the start of the period is budgeted income statement.

Ø  Budgeted Cash flow - It is the cash flow statement for the budgeted period prepared in advance accounting all possible cash inflows and cash outflows.

Ø  Budgeted Balance Sheet - It indicates expected organisation position at the end of budget period.

ACCA article: Cash Budgets