Functional Budgets

Written by True Tamplin, BSc, CEPF®

Reviewed by Subject Matter Experts

Updated on April 04, 2023

Within a company, budgets satisfy different purposes. For this reason, diverse types of budgets are commonly used.

Budgets can be grouped into the following types:

  • Time budgets (e.g., short or long period budgets)
  • Functional budgets

Functional Budgets

Functional budgets are associated with the functions of an organization. Examples of functional budgets include sales budgets, production budgets, labor budgets, cost budgets, overhead budgets, capital expenditure budgets, and cash budgets.

Types of Functional Budgets

Sales Budget

This budget is based on estimated sales during the budget period. It is also known as the backbone of the organization.

The sales budget is the starting point for budgeting; all other budgets are based on the sales budget. The sales manager is responsible for preparing the sales budget.

The procedure for creating a sales budget begins by obtaining data for past sales. These data are used to forecast future sales values.

In turn, a production budget is devised based on the sales budget. Once the sales forecast is finished, the next problem is to determine how much to produce to meet the sales budget.

The production budget is an estimate of the quantity of goods that must be produced during the budget period. While preparing a production budget, the following must be considered:

  • Sales forecast
  • Stock (closing stock and opening stock)
  • Plant capacity

Production Cost Budget

The production cost budget provides a detailed overview of the estimated cost of carrying out the production plans as per the production budget.

It represents the cost of various elements involved in production, such as materials, labor, and overheads (fixed, variable, and semi-variable).

The cost can be expressed based on each product or based on each department.

Purchase Budget

The purchase budget is concerned with purchases for the period of the budget. It is referred to the purchase of raw materials, fixed assets, and services such as electricity and gas.

The main objective of the purchase budget is to establish a plan that will allow all purchases to take place at a minimum cost.

Labor Cost Budget

The labor cost budget lays emphasis on the labor needed to meet the company's demand during the budget period.

The labor cost budget always focuses on direct and indirect labor costs. Labor requirements are specified by the human resources department, which is responsible for recruiting, training, and promoting employees.

Promotion Overhead Budget

This budget represents the forecast of all production overheads to be incurred during the budget period. The factory overheads are classified as fixed, variable and semi-variable.

When preparing this budget, consideration should be given toward the level of equality that is likely to be achieved.

Capital Expenditure Budget

This budget indicates the plans for further capital expenditure (e.g., acquiring fixed assets, improving old assets, and replacing fixed assets). Examples include the addition of a new plant or new buildings.

Cash Budget

The cash budget represents the cash requirements of the business during the budget period.

It compares the estimated cash receipts and estimated cash payments of the company during the budget period. It ensures that sufficient cash is available when required.

Master Budget

This budget combines all functional budgets into one harmonious unit.

The master budget is a summary plan of the proposed operations developed by the management for the company, covering a specific period.

It is a summary budget incorporating any functional budgets that have been finally approved, adopted, and employed.

The types of information included in a master budget are details relating to the sales budget, production budget, cash budget, and the other main functional budgets.

When the master budget is complete, the budget committee will review its details and, if approved, it will be submitted to the board of directors.

Once it is accepted and approved, it will become the basis for the company's targets over a specific period.

Functional Budgets FAQs

About the Author

True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website, view his author profile on Amazon, or check out his speaker profile on the CFA Institute website.