Question

Explain the main types of budgets used in business enterprises.

Explain any five types of budgets.

Answer 1

1. Sales Budget: The sales budget, generally, forms the fundamental basis on which all other budgets are built up. It lays down the revenue goals Of the enterprise. Sales budget is essentially a forecast of sales to be achieved during a specified period in future. The Sales Manager is directly responsible for the preparation and execution of this budget. Sales budget shows the break up of total sales productwise, territorywise and monthwise. While preparing the sales budget, the following factors should be taken into consideration:
   1. Past sales figures and trends
   2. Salesmen's estimates
   3. General trade prospects
   4. Orders on hand
   5. Future product plans
   6. Potential market
   7. Seasonal fluctuations
   8. Plant capacity
   9. Availability of materials
   10. Financial resources
   11. Other factors
       1. The nature and degree of competition in the industry.
       2. Cost of distributing goods.
       3. Government controls, rules and regulations relating to the industry.
       4. Political situation at national and international levels which may influence the market.
2. Production Budget: Production budget contains an estimate of the total volume of production productwise and week or monthwise and a forecast of the closing inventory of finished product. Generally, production budget is based upon the sales budget. However, when it is not possible to forecast sales on account of frequent changes in style and fashions, product budget is based upon past experience.
   While preparing the production budget, the following factors should be taken into consideration.
   
   1. Sales requirements
   2. Inventory policy
   3. Plant capacity
   4. Balanced production
   5. Availability of material and labour
   6. Time taken in production process
      The production budget is often divided into several budgets:
      1. Material Budget: Which fixes the quantity, quality and cost of raw materials needed for uninterrupted production.
      2. Labour Budget: Which specifies the requirements of labour in terms of the number and type of workers for various jobs.
      3. Plant and equipment Budget: Which lays down the needs of machines, equipment and tools including their repairs and maintenance.
      4. Research and Development Budget: Which specifies the estimated cost on research and development for developing new products and for improving existing ones.
3. Purchase Budget: The purchase budget contains details about the quantity and quality of various things which the firm needs to purchase during the coming year.
4. Factory Overhead Budget: Factory or manufacturing overheads include the cost of indirect labour, indirect materials and indirect expenses.
5. Administrative Overhead Budget: This budget contains the expenses of all administrative offices of the firm. A careful analysis of the needs of all administrative departments of the enterprise is necessary.
6. Selling and Distribution Overhead Budget: This budget contains all the expenses relating to selling, advertising, delivery of goods to customers, etc. These costs should be analysed according to products, types of customers, territories and the sales outlets, etc.
7. Capital Expenditure Budget: This budget indicates the amount of capital required for procurement of capital assets during the budget period. This budget is prepared after taking into account the available production capacity, probable reallocation of existing assets and possible improvements in the techniques of production.
8. Cash Budget: This budget is a summary statement of the firm's expected inflows and outflows of cash over a future time period. It involves a projection of future cash receipts and cash payments over different time intervals.
9. Master Budget: The master budget is a summary of all budgets. Therefore, it is also known as a summary budget. The Institute of Cost Management Accountants, England, has defined it as "the summary budget, incorporating its component functional budgets, which is finally approved, adopted and employed." Thus, the master budget is a summarised form of all the budgets of a firm.