CIMA BA2 Syllabus C. PLANNING AND CONTROL - Preparation of functional - Notes ^{3 / 6}

A Functional budget

is a budget of income and/or expenditure which applies to a particular function.  

The main functional budgets are:

• Sales budget

• Production budget

• Raw material usage budget

• Raw material purchases budget

• Labour budget

• Overheads budget

Sales Budget

= how many units do you plan to sell (e.g 100 units)

Production Budget

How many units do you need to produce if you want to sell eg.100 units.

You have to take into account if you have some units already in your inventory or if you need to keep some inventory at the year end (Y/E) 

Budgeted production =

= Forecast sales + closing inventory of finished goods – opening inventory of finished goods

Illustration

Finished goods inventory equal to 20% of the next month’s budgeted sales. 

Sales for the current month are 2,000 units and are budgeted to be 2,400 units next month.

How many units will be produced in the current month?

Solution

Sales 2,000
Cl Inventory 480 (20% x 2,400)
Op Inventory (400) (20% x 2000)

2,080 units will be produced this month.

Material Budget

How many kg/litres do you need to produce a certain amount of units.

• Material usage budget

  Material usage = 

  Budgeted production x Quantity required to produce one unit

• Material purchases budget

  Material purchases budget = 

  Material usage budget + closing inventory (of material kg/l) – opening inventory (of material kg/l)

Illustration

A company produces product X. 

Expected production is 3,000 units.

Each unit uses 5kg of raw materials.

What is the materials usage budget?

Solution

Materials usage = Production * Quantity/unit

= 3,000 x 5
= 15,000 kg

Labour Budget

Labour budget = no. of hours x labour rate per hour

Overhead Budget

The overhead budget will be made up of variable costs and fixed costs

Overall Illustration

Product A requires:

Direct Materials 10kg at $2/kg = $20
Direct Labour 10 hours at $10/hour = $100

Budgeted opening stock 400 units 
Budgeted opening raw materials 3,000kg

Budgeted closing stock 500 units
Budgeted closing raw materials 4,000kg 

The sales budget is 2,400 units (this is also the principal budgeting factor).

Prepare the functional budgets

• Solution

  The sales budget is the principal budget factor, therefore it will be prepared first and this is given to us at 2,400 units

• Production budget

  Opening stock (400 units)
  Sales 2,400 units
  Closing stock 500 units

  Therefore we must product 2,500 units

• Materials budget

  Materials usage budget = production units x usage per unit = 2,500 units x 10kg/unit = 25,000 kg is the usage budget

  Materials purchases budget

  Opening raw materials (3,000kg)
  Usage 25,000 kg 
  Closing raw materials 4,000kg 

  Materials purchases budget = 26,000 kg x $2/kg = $52,000

• Labour budget

  2,500 units x 10 hours per unit x $10/hour = $250,000