Functional budgets, the master budget and the cash budget
Cost and Management Accounting · Unit I · Topic 9 of 18 · 4 min read
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Cases checked to exist. Read the judgment before quoting a holding.
Every case cited here has been checked to exist — the citation resolves and names the right parties. The propositions attributed to each case have not been verified line by line against the judgment. Case names link through to the full judgment: read it before quoting a holding in an examination answer, and never carry a proposition from notes into court on trust.
1. Functional budgets
A functional budget relates to one function of the business. The syllabus lists them in order:
- Sales budget: quantity and value of sales by product, area, salesman and period. Usually the key budget, prepared first by the sales manager from past sales, market research, salesmen’s estimates, competition and general business conditions.
- Production budget: units to be produced = budgeted sales + desired closing stock of finished goods − opening stock. Limited by plant capacity.
- Production cost budget: the cost of the budgeted output, split into material, labour and factory overhead budgets.
- Plant utilisation budget: machine hours or plant capacity needed for the production budget, by department. It shows overloading (need for overtime, new plant or subcontracting) or idle capacity (need for more sales effort).
- Capital expenditure budget: planned spending on fixed assets (plant, buildings, vehicles) over several years, based on replacement needs, expansion plans and the plant utilisation budget. It needs the board’s sanction and is linked to the cash budget because the sums are large.
- Selling and distribution cost budget: salesmen’s salaries and commission, advertising, warehousing, carriage outwards; fixed parts by period, variable parts in line with the sales budget.
- Purchase (materials) budget: quantity to buy = material required for production + desired closing stock − opening stock, valued at expected prices and phased to fit stock levels and the cash budget.
- Cash budget: receipts and payments month by month (below).
Illustration. Budgeted sales 10,000 units; opening finished stock 1,500, desired closing stock 2,000. Production = 10,000 + 2,000 − 1,500 = 10,500 units. Each unit needs 2 kg of material; opening material 3,000 kg, closing 4,000 kg. Purchases = 21,000 + 4,000 − 3,000 = 22,000 kg, at Rs. 5 = Rs. 1,10,000.
2. The master budget
The master budget is the summary budget that incorporates all the functional budgets. It is usually presented as a budgeted income statement and a budgeted balance sheet for the period, and is approved by the board before it is put into operation. It shows the overall picture: the profit the plans should yield and the financial position at the end of the period.
3. Cash budget
A cash budget estimates cash receipts and payments for each month of the budget period and the resulting closing balance. It shows when the firm will be short of cash (so that a loan or overdraft can be arranged) or have surplus cash (to invest). Three methods: the receipts and payments method (used in exams), the adjusted profit and loss method, and the balance sheet method.
Rules. Only cash items go in: depreciation does not. Apply the lags: credit sales collected after the credit period; credit purchases paid after it; wages and expenses paid after any stated delay. Closing balance of one month is the opening balance of the next.
4. Solved: cash budget (BBA, January 2026)
Cash on 1 April Rs. 25,000. Sales: February 70,000, March 80,000, April 92,000, May 1,00,000, June 1,20,000. Purchases: February 40,000, March 50,000, April 52,000, May 60,000, June 55,000. Wages: 8,000, 8,000, 9,000, 10,000, 12,000. Expenses: 6,000, 7,000, 7,000, 8,000, 9,000. Suppliers allow two months’ credit; 25% of sales are cash and debtors pay after one month; wages and expenses are paid one month late; income tax Rs. 25,000 paid in June.
Workings. Cash sales: April 23,000, May 25,000, June 30,000. Collection from debtors (75% of previous month): April 60,000 (March), May 69,000 (April), June 75,000 (May). Purchases paid two months later: April pays February 40,000, May pays March 50,000, June pays April 52,000. Wages and expenses paid for the previous month.
| Particulars | April | May | June |
|---|---|---|---|
| Opening balance | 25,000 | 53,000 | 81,000 |
| Cash sales | 23,000 | 25,000 | 30,000 |
| Collection from debtors | 60,000 | 69,000 | 75,000 |
| Total (A) | 1,08,000 | 1,47,000 | 1,86,000 |
| Creditors | 40,000 | 50,000 | 52,000 |
| Wages | 8,000 | 9,000 | 10,000 |
| Expenses | 7,000 | 7,000 | 8,000 |
| Income tax | – | – | 25,000 |
| Total (B) | 55,000 | 66,000 | 95,000 |
| Closing balance (A − B) | 53,000 | 81,000 | 91,000 |
5. Cash budget as a short note
Define it; state its purposes (to ensure cash for operations, plan borrowing, invest surplus, co-ordinate capital spending, and control cash); name the three methods; note that it is prepared after the sales, purchase, labour, overhead and capital expenditure budgets because it draws on all of them.
How this is examined
The cash budget is a 10-mark problem in the 100-mark BBA paper. The theory questions ask for the types of functional budget (explain five with one line on how each is prepared) or a 6-mark note on the capital expenditure budget or the master budget. The B.Com “types of budget” essay combines the classification table in the previous note with the functional budgets here.
Now try the real questions: Cost and Management Accounting past question papers.