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Types of Budgets

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Classification
A) On the basis of Time-period
Long-term Budget
Short-term Budget
Current Budget

B) On the basis of Flexibility


Fixed Budget
Flexible Budget

C) On the basis of Coverage


Functional Budgets/ Operating Budgets
Master Budget

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According to Time-period
Long-term budget: A budget designed for a
long period of time (5-10 years).
Short-term Budget: A budget designed for
generally one year.
Current Budget: The current budget is
established for use over a short period of
time and is generally for a month or week.

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On the Basis of Flexibility
Fixed Budget: This budget is drawn for one
level of activity and is designed to remain
unchanged irrespective of the level of
activity actually attained.
Flexible Budget: A flexible budget consists
of a series of budgets for different levels of
activity.

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Fixed/Static Budget
A projection of budget data at one level of activity

Barton Steel (Forging Department)


Manufacturing Overhead Budget (Static)
For the Year Ended December 31, 2002
Budgeted
BudgetedProduction
Productionin
inunits
units(steel
(steelingots)
ingots) 10,000
10,000
Budgeted Costs
Budgeted Costs
Indirect
Indirectmaterials
materials $$250,000
250,000
Indirect labor
Indirect labor 260,000
260,000
Utilities
Utilities 190,000
190,000
Depreciation
Depreciation 280,000
280,000
Property
Propertytaxes
taxes 70,000
70,000
Supervision
Supervision 50,000
50,000
$1,100,000
$1,100,000
Fixed/Static Budget
Flexible Budget
A projection of
budget data for
various levels of
activity.
Flexible Budget
Fox Manufacturing Company (Finishing Department)
Flexible Monthly Manufacturing Overhead Budget
For the Month Ended January 31, 2002

Activity
Activitylevel
level
Direct
Direct laborhours
labor hours 8,000
8,000 9,000
9,000 10,000
10,000 11,000
11,000 12,000
12,000
Variable costs
Variable costs
Indirect
Indirectmaterials
materials($1.50)
($1.50) $12,000
$12,000 $13,500
$13,500 $15,000
$15,000 $16,500
$16,500 $18,000
$18,000
Indirect
Indirectlabor
labor($2.00)
($2.00) 16,000
16,000 18,000
18,000 20,000
20,000 22,000
22,000 24,000
24,000
Utilities ($.50)
Utilities ($.50) 4,000
4,000 4,500
4,500 5,000
5,000 5,500
5,500 6,000
6,000
Total
Totalvariable
variable 32,000
32,000 36,000
36,000 40,000
40,000 44,000
44,000 48,000
48,000
Fixed costs
Fixed costs
Depreciation
Depreciation 15,000
15,000 15,000
15,000 15,000
15,000 15,000
15,000 15,000
15,000
Supervision
Supervision 10,000
10,000 10,000
10,000 10,000
10,000 10,000
10,000 10,000
10,000
Property
Propertytaxes
taxes 5,000
5,000 5,000
5,000 5,000
5,000 5,000
5,000 5,000
5,000
Total fixed
Total fixed 30,000
30,000 30,000
30,000 30,000
30,000 30,000
30,000 30,000
30,000
Total
Totalcosts
costs $62,000
$62,000 $66,000
$66,000 $70,000
$70,000 $74,000
$74,000 $78,000
$78,000
On the Basis of Coverage
Master Budget
Functional Budgets

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Master Budget
The master budget is the summary of
various functional budgets. It is prepared by
integrating various budgets into one
consolidated budget so as to represent
budgeted P & L account and the budgeted
balance sheet at the end of the period.
The summary budget, incorporating its
component functional budgets and which is
finally approved, adopted and employed
(CIMA, London)
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Master Budget Components
Sales Budget
Sales Budget
Production Budget

Direct Material Direct Labor Mft. Overhead Operational


Budget Budget Budget Budget

Budgeted schedule Selling, General


cost of goods Cash budget and Administrative
manufactured and sold Budget

Budgeted income
Statement R&D
Budget

Capital Budget Budgeted balance Marketing


Statement Budget

Budgeted Statement Customer Service


of Cash Flows Budget
Functional/Operating Budgets
These budget relate to the different activities or
operations of a firm. The number of such budgets
depends upon the size and nature of business.
Functional Budgets
Sales Budget
Production Budget
Materials Budget
Labour and Personnel Budget
Manufacturing Overhead Budget
Administration Cost Budget
Capital Expenditure Budget
Selling and distribution cost Budget
Cash Budget

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Sales Budget
The sales budget is a statement of planned sales in
terms of quantity and value.
Nerve centre of the enterprise.
Factors to be considered
Past sales figures
Salesmens assessment and reports
Availability of Raw Materials
Plant capacity
Seasonal fluctuations
Financial Aspects

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Sales Budget
The
Thesales
salesbudget
budgetdisplays
displaysthe
theprojected
projected sales
salesin
in
units
unitsand
andthe
theprojected
projected sales
sales return
return
1st 2nd 3rd 4th Year
Sales in
Units 15,000 5,000 10,000 20,000 50,000
Unit sales
price X $12 X $12 X $12 X $12 X $12
Total sales
revenue $180,000 $60,000 $120,000 $240,000 $600,000

Seasonal
SeasonalPattern
Patternin
inSales
Sales
Production Budget
Production budget is a forecast of the production
for the budget period.
It is prepared for the number of units to be
produced and also for the cost (of raw materials,
labour and factory overheads) to be incurred.
Considerable factors:
Considering Sales budget
Production Planning
Plant capacity
Inventory policy
Production Cost Budget
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Materials Budget
The materials budget is concerned with
estimating the quantities of raw materials
required for production (as demanded by
the production budget).
May be classified into
Material requirement Budget
Material procurement Budget

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Direct Labour Budget
This budget gives an estimate of the
requirements of direct labour essential to meet
the production target.
May be classified into
Labour requirement Budget
Labour recruitment Budget

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Manufacturing Overheads
Budget
The budget gives an estimate of the works
overhead expenses to be incurred in a
budget period to achieve the production
target.
Includes the cost of indirect materials,
indirect labour and indirect works expenses.

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Administration Expenses Budget
This budget covers the expenses incurred in
framing policies, directing the organization
and controlling the business operations.
Basically it provides an estimate of the
expenses of central office and of
management salaries.

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Selling and Distribution Overhead
Budget
This budget includes all expenses relating
to selling, advertising and distribution of
goods.
Fixed expenses under this category may be
estimated based on the past experience and
anticipated changes.
Variable selling and distribution overheads
will vary with the anticipated sales figures.

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Cash Budget
A cash budget is an estimate of cash
receipts and disbursements during a future
period of time.
The cash budget is an analysis of flow of
cash in a business over a future period of
time i.e. it is forecast of expected cash
intake and outlay.

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Capital Expenditure Budget
The budget is an estimate of expenditure to
be incurred on fixed assets during the
budget period
Based upon the annual forecasts of capital
expenditure of various divisions or
departments and requires attention of top
management as the amount involved is very
high.
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PRACTICE TEST
EXERCISE 1
ABC Company has prepared a unit sales budget for the upcoming months as follows:
Month Units Month Units
January 5,000 June 30,000
February 7,500 July 35,000
March 10,000 August 25,000
April 15,000 September 10,000
May 20,000 October 6,000
ABC has a policy to maintain inventory levels equal to 30% of the coming months sales
requirements. Inventory on January 1 is projected to be 1,200 units.
Required:
Prepare a production budget for ABC Company for the next six months.

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ABC Company

Production Budget
January February March April May June
Sales 5,000 7,500 10,000 15,000 20,000 30,000
Ending inventory 2,2503,0004,5006,0009,00010,500
Total needs 7,250 10,50014,50021,00029,00040,500
Less:Beginning inventory 1,2002,2503,0004,5006,0009,000
Units to be produced 6,0508,25011,50016,50023,000
31,500

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