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 provision should be made for
damages and deterioration of items held in store, as follows.
Product S: loss of 50 units Material D: loss of 500 litres
Product T: loss of 100 units Material E: loss of 200 kilograms
Required
Prepare a material purchases budget for 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
Budgeted material purchases 52,950 42,300
Unit cost $3 $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
Expected hourly rate (labour) $9 $9 $9

Prepare 1. Sales 2.Production 3. Material Usage 4. Material Purchase 5. Labour Budget

1. Sales Budget

Product X Product Y 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

Production RM11 RM22 RM33

Units Units Units Units
Product X 2,100 2100*5=10,500 4,200 –
Product Y 4,200 4200*3=12,600 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
Hours Rate
Production required Total per
Product Units per unit hours hour $ Cost $
X 2,100 4 8,400 9 75,600
Y 4,200 6 25,200 9 226,800
Z 3,100 8 24,800 9 223,200
Budgeted total wages 525,600
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