Sales Budget

Sales Budget is one of the important functional budget. Sales estimate is the
commencement of budgeting may be made in quantitative terms. Sales budget is
primarily concerned with forecasting of what products will be sold in what
quantities and at what prices during the budget period. Sales budget is prepared by
the sales executives taking into account number of relevant and influencing factors
such as :
(1) Analysis of past sales (Product wise; Territory wise, Quote wise).
(2) Key Factors.
(3) Market Conditions.
(4) Production Capacity.
(5) Government Restrictions.
(6) Competitor's Strength and Weakness.
(7) Advertisement, Publicity and Sales Promotion.
(8) Pricing Policy.
(9) Consumer Behaviour.
(10) Nature of Business.
( 11 ) Types of Product.
(12) Company Objectives.

(13) Salesmen's Report.

(14) Marketing Research's Reports.

(15) Product Life Cycle.

Production Budget
Production budget is usually prepared on the basis of sales budget. But it also
takes into account the stock levels desired to be maintained. The estimated
output of business firm during a budget period will be forecast in production
budget. The production budget determines the level of activity of the produce
business and facilities planning of production so as to maximum efficiency. The
production budget is prepared by the chief executives of the production
department. While preparing the production budget, the factors like estimated
sales, availability of raw materials, plant capacity, availability of labour, budgeted
stock requirements etc. are carefully considered.

Cost of Production Budget

After Preparation of production budget, this budget is prepared. Production Cost
Budgets show the cost of the production determined in the production budget. Cost
of Production Budget is grouped in to Material Cost Budget, Labour Cost Budget
and Overhead Cost Budget. Because it breaks up the cost of each product into three
main elements material, labour and overheads. Overheads may be further
subdivided in to fixed, variable and semi-fixed overheads. Therefore separate
budgets required for each item.
Material Purchase Budget
The different level of material stock are based on planned out. Once the production
budget is prepared, it is necessary to considered the requirement of materials to
carryout the production activities. Material Purchase Budget is concerned with
purchase and requirement of direct materials to be made during the budget period.
While preparing the materials purchase budget, the following factors to be
considered carefully:
(1) Estimated sales and production.
(2) Requirement of materials during budget period.
(3) Expected changes in the prices of raw materials.
(4) Different stock levels, EOQ etc.
(5) Availability of raw materials, i.e., seasonal or otherwise.
(6) Availability of financial resources.

(7) Price trend in the market.

(8) Company's stock policy etc.

Direct Labor Budget

Direct labor budget shows the total direct labor cost and number of direct labor
hours needed for production. It helps the management to plan its labor force
requirements. Direct labor budget is a component of master budget. It is prepared
after the preparation of production budget because the budgeted production in units
figure provided by the production budget serves as starting point in direct labor
budget.

Following are the calculations involved in the direct labor budget:

Planned Production in units Direct Labor Hours Required per Unit =
Budgeted Direct Labor Hours Required Cost per Direct Labor Hours =
Budgeted Direct Labor Cost

Manufacturing overhead budget

Manufacturing overhead (also known as factory overhead, factory burden,

production overhead) involves a company's factory operations. It includes the costs
incurred in the factory other than the costs of direct materials and direct labor. This
is the reason that manufacturing overhead is often classified as an indirect cost.

Generally accepted accounting principles require that cost of direct material cost,
direct labor, and manufacturing overhead be considered as the cost of products for
valuing inventory and for determining the cost of goods sold. (Expenses that are
outside of the factory, such as selling, general and administrative expenses, are not
product costs and are not inventoriable. They are reported as expenses on
the income statement in the accounting period in which they occur.)

Examples of manufacturing overhead include the depreciation or the rent on the

factory building, depreciation on the factory equipment, supervisors in the factory,
the factory quality control department, factory maintenance employees, electricity
and gas for the factory, indirect factory supplies, etc.

Because manufacturing overhead is an indirect cost, accountants are faced with the
task of assigning or allocating overhead costs to each of the units produced. This is
a challenging task because there may be no direct relationship. (For example, the
property tax on the factory building is based on its assessed value and not on the
number of units produced. Yet the property tax must be assigned to the units
manufactured.)

Selling and Administrative Expense Budget

Selling and administrative expense budget

Selling and administrative expense budget is a schedule of planned operating

expenses other than manufacturing costs. It is a component of master budget and it
is prepared by all types of businesses (i.e. manufacturers, retailers and service
providers) before the preparation of budgeted income statement. Usually it is
divided in two sections: the selling expenses and the administrative expenses.
Both selling expenses and administrative expense may be fixed or variable (see
cost behaviour). For example sales commission and freight cost on sales are
variable selling expenses where as sales salaries are fixed selling expenses.
Similarly depreciation and rent on office building are fixed administrative expenses
whereas office supplies and utilities expense are variable administrative expenses.

Different variable selling and administrative expenses vary with different types
activities. For example sales commission vary with number of units sold,
entertainment expenses with number of employees in the organization etc.,
therefore an accurate selling and administrative expenses budget can be made by
using activity based costing.

Cash Budget
This budget represent the anticipated receipts and payment of cash during the
budget period. The cash budget also called as Functional Budget. Cash budget is
the most important of all the functional budget because, cash is required for the
purpose to meeting its current cash obligations. If at any time, a concern fails to
meet its obligations, it will be technically insolvent. Therefore, this budget is
prepared on the basis of detailed cash receipts and cash payments. The estimated
Cash Receipts include:
(1) Cash Sales
(2) Credit Sales
(3) Collection from Sundry Debtors
(4) Bills Receivable
(5) Interest Received
(6) Income from Sale of Investment
(7) Commission Received
(8) Dividend Received
(9) Income from Non-Trading Operations etc.
The estimated Cash Payments include the following :
(1) Cash Purchase
(2) Payment to Creditors
(3) Payment of Wages
(4) Payments relate to Production Expenses
(5) Payments relate to Office and Administrative Expenses
(6) Payments relate to Selling and Distribution Expenses
(7) Any other payments relate to Revenue and Capital Expenditure
(8) Income Tax Payable, Dividend Payable etc.

Master Budget
When the functional budgets have been completed, the budget committee will
prepare a Master Budget for the target of the concern. Accordingly a budget which
is prepared incorporating the summaries of all functional budgets. It comprises of
budgeted profit and loss account, budgeted balance sheet, budgeted production,
sales and costs. The ICMA England defines a Master Budget as "the summary
budget incorporating its functional budgets, which is finally approved, adopted and
employed." The Master Budget represents the activities of a business during a
profit plan. This budget is also helpful in coordinating activities of various
functional departments.