## Key Functional Budgets in Detail
### Production Budget
Determines what quantity to produce, balancing three competing factors:
1. Seasonal build-up — stockpile during off-season to meet peak-season demand
2. Uniform production — steady output to fully utilise plant and avoid worker retrenchment/lay-off
3. Minimum inventory — produce just enough to avoid locking up funds in stock
Production Budget can show:
- Stabilised production every month (maximises plant utilisation; inventory costs vary)
- Stabilised minimum inventory (reduces holding costs; production level varies)
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### Plant Utilisation Budget
Expresses plant requirements in working hours, weight, or other convenient units to match the production budget.
Main Purposes:
1. Determine the load on each process/cost centre/machine group for the budget period
2. Identify overloaded processes so corrective action can be taken:
- Working overtime
- Sub-contracting
- Expanding production facility
3. Dovetail sales and production budgets where capacity cannot be increased
4. Where surplus capacity exists, boost sales efforts to utilise it
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### Direct Labour (Personnel) Budget
Merits:
1. Defines both direct and indirect labour force requirements
2. Enables HR to plan recruitment and training ahead, reducing labour turnover
3. Reveals labour cost to facilitate manufacturing cost budgets and cash budgets (wage financing)
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### Selling and Distribution Cost Budget
Key Challenges:
1. Heavy selling/promotion expenditure may be needed precisely when sales are falling — inflating cost-to-sales ratio
2. Intensive efforts in one year may yield benefits only in subsequent years, making proportional allocation difficult
3. Despite these challenges, the Budget Controller must establish a working relationship between selling cost and sales volume
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### Advertisement Cost Budget
Basis for deciding advertisement spend:
1. A percentage of total budgeted sales value or expected profit (based on past experience)
2. An amount matching expected competitor spend
3. A fixed sum per unit of output added to cost
4. An amount based on the company's financial ability to spend
Key Considerations:
- Select the most suitable advertising method (costs vary widely by medium)
- Set a clear budget for a defined period (typically one year)
- Align advertising with product availability to avoid wasted expenditure
- Monitor advertising effectiveness regularly
- Link advertising investment to expected sales growth to optimise ROI