Cost Budgets
Budget is a financial plan and is a process by which a planning or financial manager anticipates the future, looks for alternative courses of action and predetermines a course of action to be taken in relation to known events and the possibilities of future problems that might come up. Cost budget is a financial plan worked out for each major expense category like production costs, financing cost, selling cost, administrative costs etc.
Broadly, there are three main purposes of a budget:
(1) Planning
(2) Co-ordination
(3) Control.
Budgets can be classified by various categories. A popular method is to classify the budgets according to it’s’ function. The classification is:
(1) Sales Budget
(2) Production Budget
(3) Materials purchase budget
(4) Labor Budget
(5) Overhead Budget
(6) Research Budget
(7) Cost of Production budget
(8) Capital expenditure budget
(9) Cash budget
(10) Master budget
Example: Let us prepare a Production Budget and cost of Production Budget for three months ending 31st March 2009 from the following information.
A factory produces 3 products: A, B & C.
Given:
| Product | Estimated Stock
As
on 01-01-09
(in units)
| Estimated Stock
As
on 31-03-09
(in units)
| Estimated Sales
during the period
(in units)
|
|
A |
2000 |
3000 |
10000 |
|
B |
3000 |
5000 |
15000 |
|
C |
4000 |
3000 |
13000 |
Solution:
Production Budget (in units)
| A | B | C |
| Estimated Sales | 10000 | 15000 | 13000 |
| Add: Estimated closing stock | 3000 | 5000 | 3000 |
| 13000 | 20000 | 16000 |
| Less: Estimated opening stock | 2000 | 3000 | 4000 |
| Production Budget | 11000 | 17000 | 12000 |
Estimated that the cost of producing per unit of Product A is $10, Product B is $15 and Product C is $12.
Cost of Production Budget:
Cost of Producing Product A = $10*11000 units = $110,000
Cost of Producing Product B = $15*17000 units = $255,000
Cost of Producing Product C = $12*12000 units = $144,000
Total budgeted cost of production = $509,000
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