Functional budget

Functional budget
See also
Cost element Costing system Master budget Indirect material Controllable costs Resource plan Functional strategy Cost classification Cash Flow Plans

Functional budget shows revenues and expenses for each separate functional area. In a business, the major functional areas are marketing, finance, and production. In a nonprofit, these might be development, finance, and services. The services subunit can then be further broken down into program subunits, if desired. The main advantage is that each area can be held responsible for costs, revenues versus costs, or net revenue versus investment.

The functional budget delivers a better understanding of what funds are to be spent. It combines information about inputs and responsibility centres or programs that are being funded. It also permits a certain amount of cross-program comparison within the overall budget of the organization.

Types of the functional budgets

Functional budgets are prepared for each function and they are subsidiary to the master budget of the business. Types of the functional budgets to be prepared will vary according to the size and nature of the business. The commonly used functional budgets are:

• Sales budget
• Production budget
• Plant utilisation budget
• Direct materialusage budget
• Direct material purchase budget
• Direct labour budget
• Factory overhead budget
• Production cost budget
• Ending-inventory budget
• Cost of goods sold budget
• Selling and distribution cost budget
• Administration expenses budget
• Research and development cost budget
• Cash budget

Limitations of financial budget

There are several significant limitations to the functional budgets. Structure limits management's ability to discern the spending flow in terms of the total operation. Knowing 'what spending is for' is equally as important to management as knowing ' how money is being spent' ( i.e. function, salaries, travel and other). For example, since that is a multi-product firm, the knowledge of planned expenditure for individual products, especially when considered in relation to forecasted sales, would be as valuable to management planning, controlling and decision-making as the knowledge of the function and object for which spending occurs.

The example of the advertising division illustrates the inability of the functional budget to provide product information. Although the total advertising costs for a product line are identified, the structure does not provide any indication of the planned spending for individual products. Even though advertisements do cover an entire product line, a large number of individual product advertisements are included with the total product line costs: consequently, they cannot be easily separated.Thus, the identification of the total marketing spending for a specific product is virtually impossible under the functional budgets structure.

References

• Graham A., (2014). Canadian Public-Sector Financial Management, McGill-Queen's University Press, Ottawa.
• Hankin J.A., Seidner A., Zietlow J., (1998). Financial Management for Nonprofit Organizations, John Wiley & Sons, Toronto.
• Tulsian P.C., Tulsian S.D., (2002). Commercial Studies & Application, Ratna Sagar, Delhi.
• Wilson R.M., (2016). Financial Dimensions of Marketing, Macmillan International Higher Education, Sheffield.

Author: Dawid Barcik