Functional budgets

H&P CH:11
 Functional/departmental budgets include
budgets for :
 SALES,
 PRODUCTION,
 PURCHASES AND
 LABOUR.
Departmental/functional budget is a 'budget of income and/or
expenditure applicable to a particular function frequently
including:
• sales budget,
• production cost budget (based on budgeted production, efficiency and
utilisation),
• purchasing budget,
• human resources budget,
• marketing budget and
• research and development budget’.
--CIMA Official Terminology
Example 1: PREPARING A MATERIALS PURCHASES BUDGET

ECO Co manufactures two products, S and T, which use the same

raw materials, D and E. One unit of S uses 3 litres of D and 4
kilograms of E. One unit of T uses 5 litres of D and 2 kilograms of E.
A litre of D is expected to cost $3 and a
kilogram of E $7.

Budgeted sales for 20X2 are 8,000 units of S and 6,000 units of T;
finished goods in inventory at 1 January 20X2 are 1,500 units of S
and 300 units of T, and the company plans to hold inventories of
600 units of each product at 31 December 20X2.
Inventories of raw material are 6,000 litres of D and 2,800 kilograms
of E at 1 January and the company plans to hold 5,000 litres and
3,500 kilograms respectively at 31 December 20X2.

The warehouse and stores managers have suggested that a

Product S:
provision should be made
loss of 50for damages
units and
Material deterioration
D: loss of 500 litresof items
held in store, as follows.
Required loss of 100 Material E: loss of 200
Prepare Product
a material purchases budget
T: units kilogramsfor the year 20X2
1. Budgeted production volume

To calculate material purchases requirements

it is first necessary to calculate the material usage requirements.
That in
turn depends on calculating the budgeted production volumes.

Product S Product T
Units Units
Production required
To meet sales demand 8,000 6,000
Add; To provide for inventory loss 50 100
Add; For closing inventory
600 600
8,650 6,700
Less: inventory already in hand 1,500 300
Budgeted production
volume 7,150 6,400
2. Cost of Material Purchases

Material D Material E
Litres Kgs
Usage requirements

To produce 7,150 units of S @3ltr and

4kg 21,450 28,600
To produce 6,400 units of T @5ltr and
2kg 32,000 12,800
Add: To provide for inventory loss 500 200
Add: For closing
inventory 5,000 3,500
58,950 45,100
Less inventory already in hand 6,000 2,800
Unit cost Budgeted material purchases 52,950
$3 42,300
$7
Cost of material purchases $158,850 $296,100
Total cost of material purchases $454,950
Example 2: different types of functional budget
XYZ company produces three products X, Y and Z. For the coming accounting period
budgets are to be prepared based on the following information.
Budgeted sales
Product X 2,000 at $100 each
Product Y 4,000 at $130 each
Product Z 3,000 at $150 each
Budgeted usage of raw material
RM11 RM22 RM33
Product X 5 2 –
Product Y 3 2 2
Product Z 2 1 3
Cost per unit of
material $5 $3 $4
Finished inventories
budget
Product X Product Y Product Z
Opening 500 800 700
Closing 600 1,000 800
Raw materials inventory budget
RM11 RM22 RM33
Opening 21,000 10,000 16,000
Closing 18,000 9,000 12,000
Product X Product Y Product Z
Expected hours per
unit 4 6 8
Prepare 1. Sales
Expected hourly rate 2.Production 3. Material Usage 4. Material Purchase
(labour) $9 $9 $9
5. Labour Budget
1. Sales Budget
Product Y
Product X Product Z Total
Sales quantity
2,000 4,000 3,000

Sales price $100 $130 $150

Sales value $ 200,000 $520,000 $450,000 $1,170,000

2. Production budget
Product X Product Y Product Z
Units Units Units
Sales quantity 2,000 4,000 3,000
Add: Closing inventories
600 1,000 800
2,600 5,000 3,800
Less: opening
inventories 500 800 700
Budgeted production 2,100 4,200 3,100
3. Material usage/consumption budget

Productio
n RM11 RM22 RM33
Units Units Units Units
2100*5=10,50
Product X 2,100 0 4,200 –
4200*3=12,60
Product Y 4,200 0 8,400 8,400
Product Z 3,100 3100*2=6,200 3,100 9,300
Budgeted material
usage 29,300 15,700 17,700
4. Raw Material purchases budget

RM11 RM22 RM33

Units Units Units
Budgeted material usage 29,300 15,700 17,700
Add; Closing inventories 18,000 9,000 12,000
47,300 24,700 29,700
Less: opening inventories 21,000 10,000 16,000
Budgeted material
purchases 26,300 14,700 13,700
Standard cost per unit $5 $3 $4
Budgeted material
purchases $ 131,500 $44,100 $54,800
5. Labour budget
Rate
Hours Total per
Production required hours hour Cost
Product Units per unit $ $
X 2,100 4 8,400 9 75,600
25,20 226,80
Y 4,200 6 0 9 0
24,80 223,20
Z 3,100 8 0 9 0
525,60
Budgeted total wages 0
Example 3
 The following information is available for B Co.
 Budgeted annual sales 100,000 units
 Opening inventory 25,000 units
 Closing inventory 27,500 units
 What is the number of units of production for the year?

Units made = units sold

+ closing inventory
units – opening
inventory units
= 100,000 + 27,500 –
25,000
= 102,500