IGNOU : M.COM : MCO 5 : UNIT 9 : Q - 2. Write short notes on the following : i) Sales Budget ii) Material Budget iii) Production Cost Budget iv) Overhead Budget

Ans. 

i) Sales Budget

The sales budget is usually the keystone in planning and control of operation of a business. Sales forecast serves as a base for the sales budget. The sales budget is prepared in quantitative terms of units expected to be sold and the value expected to be realised. The Sales Manager should be made directly responsible for the preparation and execution of sales budget. This is prepared according to the requirements of the business while preparing sales budget. The useful classification may be-products, territories, customers, salesmen, etc. More than one classification may be employed. However, at the time of preparing sales budget the following factors should be kept in mind:

(a) salesmen’s estimates (b) orders in hand (c) Past behaviour (d) Management policies for future (e) seasonal fluctuations (f) availability of materials (g) plant capacity (h) availability of finance (i) potential market (j) level of competition (k) position of competitors, etc.

ii) Material Budget 

Materials are either direct or indirect. The Material budget generally deals only with the direct materials. Indirect materials are generally included in overhead budget. The material requirements are estimated on the basis of quantity of each class of products to be produced by multiplying the exact material requirement for each class of product by the number of units of that class. Material budget can be prepared on the basis of standards or, historical data regarding percentage of raw materials to total cost, adjusted for current price and normal wastage of material. The factors to be considered while preparing the Material Budget are : the quantity of material required for the production budget, tentative dates by which required material must be available, the availability of storage facilities as well as credit facilities, price trends in the market, nature of the materials required etc. Only direct materials are to be taken into account and indirect materials are not taken into account as they are considered under overheads budget. The material budget helps the management for proper planning of purchases. The object of the budget is to ensure the availability of adequate quantities of materials as and when required. It will be included in the Master Budget after the approval of Budget Committee.

iii) PRODUCTION COST BUDGET

This budget is a forecast of the cost of production which has been planned in the production budget. The production budget is prepared in terms of quantity to be produced. The amount is shown in this budget. The total cost of production is arrived at by adding the cost of materials, labour and manufacturing overheads. The quantity of material, the time taken by labour and the estimated costs of material, labour and expenses- all can be shown as part of production cost budget also.

iv) Overhead Budget 

The overheads budget should be prepared in three parts as follows :

1) Manufacturing Overhead Budget

2) Administration Overhead Budget, and

3) Selling and Distribution Overhead Budget.

Manufacturing Overhead Budget

The budget is an estimate of the manufacturing overhead costs to be incurred in the budget period to achieve the targeted production. Manufacturing overheads include indirect material, indirect labour, and indirect expenses related to the factory. The cost of each and every item of these three components of manufacturing overhead is separately estimated as per the requirements of production. 3

Administration Overhead Budget

Administration overhead includes the costs of framing policies, directing the organisation and controlling the business operations. Most of the administration expenses are normally unconnected with the volume of activity, therefore, experience and anticipated changes in conditions are the guides for the preparation of this budget.

Selling and Distribution Overhead Budget

The budget includes all expenses relating to selling, advertising, delivery of goods to customers, etc. The overheads may be determined on the basis of sales targets being allocated to different territories or salesman etc. Those expenses which generally vary with the sales quantity are estimated on sales basis, others which are of a fixed nature, are estimated on the basis of past experience and anticipated changes. The responsibility for the preparation of this budget lies with the executives of the sales departments.