Budgeting and Types of Budget
Budgeting is a detailed plan of operations for a specific future period. It is an estimate prepared in advance of the period to which it applies. It is prepared in advance and is based on a future plan of action. It relates to a future period and is based on objectives to be attained. Budgeting is a statement expressed in monetary or physical units prepared for the implementation of policy formulated by the management.
Budgeting can be classified into different categories namely:
The sales budget, generally, forms the fundamental basis on which all the budgets are built up. The budget is essentially a forecast of sales to be achieved in a budget period. A sales manager should consider the following factors,
- past sales figures and trends
- sales mans estimates
- plant capacity
- general trade prospects
- orders on hands
- proposed expansion or discontinuance of products
- seasonal fluctuations
- potential market
- availability of materials and supply
- financial factors
Production budget provides an estimate of the total volume of production, with the scheduling of operations by days weeks and months and a forecast of the closing finished product inventory. The objectives of its preparation are what are to be produced? When it is to be produced? How it is to be produced? Where it is to be produced? The planning of production program is essential to have sufficient stock for sales, to keep inventories within reasonable limits. To achieve it the following factors should be taken into consideration.
- inventory policy
- sales requirement
- production stability
- plant capacity
- availability of materials and labours
- time taken in production process
COST OF PRODUCTION BUDGET:
After determining the volume of production, it is necessary to determine the cost of producing this output. Cost of production includes materials, labour and overheads and, therefore, separate budgets for each of these items will be prepared.
Materials may be direct or indirect the materials budget generally deals only with the direct materials. Indirect materials are generally included in overhead budget and the preparation of materials budget includes the following:
- the preparation of estimates of raw material requirements
- the scheduling of purchases in required quantities at the required time
- the controlling of raw materials inventories
DIRECT LABOUR BUDGET:
Direct labour budget tells about the estimates of direct labour requirements, essential for carrying out the budgeted output. For preparation of this budget, previous records of the percentage labour cost in the total cost of each product, group or department will be considerably helpful. The budget may give details regarding direct labour cost only, or more direct labour hours and cost. Labour budget may be divided into two categories
- direct labour requirement budget
- direct labour procurement budget
FACTORY OVERHEAD BUDGET:
Manufacturing or factory overhead budget includes the cost of indirect labour, indirect materials and indirect expenses. The manufacturing overheads can be classified into three categories,
- semi variable
The manufacturing overheads budget will provide an estimate of these overheads to be incurred in the budget period.
ADMINISTRATION OVERHEADS BUDGET:
The administration overheads budget covers the expenses of an administration office and of management salaries. A careful analysis of the needs of all administrative departments of the enterprise is very necessary. The minimum requirements for the efficient operation of each department can be estimated on the basis of costs for prior years, and study of the plans and responsibilities of each administrative department for the budget period.
SELLING AND DISTRIBUTION OVERHEADS BUDGET:
The budget includes all expenses relating to selling, advertising and delivery of goods to customers. It is better if such cost is analyzed according to products, types of customers, territories, and according to the sales department in the organization. The preparation of the budget would depend on the analysis of the market situation by the management, advertising policies, research programs and variable elements.
CAPITAL EXPENDITURE BUDGET:
The budget provides guidance as to the amount of capital that may be needed for procurement of capital assets during the budget period. The budget is prepared after taking into account the available productive capacities, probable reallocation of existing assets and possible improvement in production techniques.
Cash budget is a summary statement of the firms, expected cash inflows and outflows over a projected time period. In other words, cash budget involves a projection of future cash receipts and cash disburse over various time intervals.