Master Budget- Functional Budget
Master Budget:
The collection of a series of subsidiary
or functional budgets into a total or master budget is the outcome of the budgeting
process.
The master budget which covers a definite period of time, such as a year, represents
the overall plan of operations which the management develops for the company. The master
budget formally expresses the managerial policies & goals for a specified period
which, with respect to functions & organizational responsibilities are broken
down into details.
The master budget together with the subsidiary budgets on completion will be submitted
for approval to the budget committee.
Constituent Elements of a Master Budget:
A
master budget comprises a number of functional & financial
budgets.
Functional Budget:Functional budget is related to a major function of the business. The usual functional budgets are:
- Sales Budget:The sales in terms of quantity & value
which are analyzed by the product, by region, by month, by salesman & by distribution
channels are shown by this budget.
- Selling Expenses Budget: The salaries & commission
of salesmen’s, expenses & other related costs is included in this budget.
- Distribution Expenses Budget:Charges for transportation,
charges for freight, warehousing, stock control, wages, expenses & related
administrative costs is included in this budget.
- Marketing Budget:Marketing budget, apart from details
regarding advertising, activities related to promotion, market research, customers
service, public relations & so forth; also includes a summery relating to sales,
selling expenses & marketing expenses budgets.
- Research & Development Budget:Materials, salaries,
expenses, equipment & supplies & other costs which are related with design,
development & technical research projects are included in research & development
budget.
- Production Budget:Production budget aims to supply specified quality of finished goods so that the marketing demands can be met. Levels of finished goods stock is specified by the distribution budget & for providing detailed production requirements this can be related with the sales budget. Following from this, consideration of a series of subsidiary budgets becomes necessary:
- Raw Materials Budget:Appropriate attention to the desired
levels of stock is paid by this budget.
- Labour Budget:This budget ensures that at the right time
the required number of employees with suitable skills & of suitable grade will
be made available by the plan.
- Manufacturing Overheads budget:Items such as consumable materials & waste disposal is covered by this budget.
- Purchasing Budget:While preparing this budget along with
the answers to the questions regarding when, where & at what price to buy & how
often to buy, consideration has to given to raw materials, consumable items, office
supplies & equipments & the whole range of requirements of an organization.
- Administration Expenses Budget: Such expenses as
salaries & upkeep of office, salaries of management, stationery, telephones,
depreciation, postage etc. are dealt with by this budget.
- Manpower Budget:An overall view of the need of the organization regarding manpower for all the areas of activity for a period of years-like manufacturing, administrative, sales, executive activities & so on, must be taken by the manpower budget. Training expenses budget & recruitment expenses budget can be formulated on the basis of the manpower budget & policies.
Illustration1:
Prepare a materials purchase budget for the 3
months- January, February & March from the following information:
(a) Estimated sales of finished products:
January 12000
units
February 14000
units
March 16000
units
April 13200
units
May 16800
units
(b) It is required as per stocking policy to maintain at the end of the month a sufficient
quantity of finished goods so as to satisfy 25% of the estimated sales for the following
month. 3000 units were in stock on 1st January.
(c) The standard requirement of per unit material as per the standard card of the product
is:
Standard quantity: Material X 2
kg @ $ 2.50 per kg
Material
Y 4 Kg @ $ 1.50 per kg
Stoking policy required the maintenance at the end of each month, of a sufficient quantity
of raw materials so that 50% of the production requirement of the following month can
be met. The adherence of this policy is always required.
Solution:
Production Budget
Jan Feb Mar April
Units Units Units Units
Estimated Sales 12000 14000 16000 13200
Desired Closing Inventory equal
to 25% of sales demand for
following month 3500 4000 3300 4200
15500 18000 19300 17400
Opening Inventory (3000) (3500) (4000) (3300)
Budgeted Production (in units) 12500 14500 15300 14100
Material
Usage Budget
Jan Feb Mar April
Kg Kg Kg Kg
Material X @ 2 Kg per unit 25000 29000 30600 28200
Material Y @ 4 Kg per unit 50000 58000 61200 56400
Material Purchase Budget
Jan Feb Mar
Material X:
Usage Quantities (Kg) 25000 29000 30600
Desired closing stock equal to 50% of
production requirements for following
month 14500 15300 14100
39500 44300 44700
Opening Inventory (12500) (14500) (15300)
Purchase Quantities 27000 29800 29400
Price per Kg $
2.50 $
2.50 $
2.50
Value of purchases $
67500 $74500 $
73500
Material Y:
Usage Quantities (Kg) 50000 58000 61200
Desired closing stock equal to 50% of
production requirements for following
month 29000 30600 28200
79000 88600 89400
Opening Inventory (25000) (29000) (30600)
Purchase Quantities 54000 59600 58800
Price per Kg $1.50 $1.50 $1.50
Value of purchases $
81000 $
89400 $
88200
Illustration 2: PKS Ltd, for the purpose of export makes a range
of certain equipments. The company while producing the budget for 2010 realizes that
its principal budget factor is sales, & thus forecasts the following sales:
Product name K E S
Sales 500 1000 250
Selling Price $
100 $
150 $
200
The unit direct costs of manufacturing each type of equipment are:
K E S
Materials:
L (at $ 0.20 per mt.) 10mt. 12mt. 14mt.
W (at 4 per kg) 2.4Kg 2.6Kg 2.8Kg
Labour:
St (at $ 4 per hour) 1
hr 1.5
hr 2
hr
A (at $ 6 per hour) 1
hr 1
hr 2
hr
The company has stock of finished goods of 100 K, 100 E & 50 S & stock of raw
materials of 1000 mt. of L & 500 Kg of W. The company wishes to have sufficient
finished good’s stock so that it can cope with 10% of the demand & raw materials
to cope with 20% of the demand.
You are required to produce:
(a) Sales budget;
(b) Production budget (in numbers of K, E & S);
(c) Materials usage budget (for L & W);
(d) Materials purchase budget; &
(e) Labour Utilization budget.
Illustration 3:
Banta Ltd manufactured children’s toys & its
range consists of 4 different models: a play school, a school, a house & a garden.
Over 90% of the sales made in two months of the year & as a result of this the
establishment of accurate budget becomes necessary.
Relating to the projections for June & July 2010, the following information has
been provided:
(1) Sales: Play
school School House Garden
Quantity 6000 7750 4500 4250
Price $
20 $28 $
40 $
24
(2) Material Usage: Play
school ($) School ($) House
($) Garden($)
Moulded Plastic 8 12 16 10
Accessories (bought in) 4 4 2 2
Packing (per toy) 4 4 2 2
(3) For each of the models, wages costs will be $ 2 per unit.
(4) Stocks of raw materials & work-in-progress are to be zero at the beginning & at
the end of the period. During the earlier part of the year the finished stock
is built up & it is anticipated that at 31st July, some stocks will be on hand.
Estimated
Stocks (units)
Finished goods: 1.06.11 31.07.11
Play Schools 3000 750
Schools 4000 1000
Houses 3000 500
Gardens 2250 250
You are required to prepare:
(a) Budgets for sales, production, materials usage & purchases for the two months
ended 31st July, 2011.
(b) A budgeted trading account for the two months ended 31st July, 2011.
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