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[Music] foreign to plan means planning to fail yes if you don't plan well you are heading towards disaster so how do businesses plan one of the tools for planning is to prepare budgets so in this video I'm going to discuss four functional budgets you can also call them operational budgets so without a further Ado let's jump into the discussion the very first budget we prepare is the sales budget also known as mother of all budgets okay budgeting is done in sequence so the very first budget we prepared is called sales budget so I'm preparing a sales budget here please keep in mind if you compare all the budget sales budget is the easiest one all we need is just two information number one units to be sold obviously this information you'll get from your marketing research department so the demand they forecast and we we assume that 1000 units this is units to be sold in January 2000 units to be sold in February 3000 in March and let's say 4 000 in April the other information you need here is the selling price per unit so to in order to make the example simple I'm assuming it to be ten dollars okay throughout so we are selling this many units but the selling price will be ten dollars so just multiply number of units by selling price you get the sales value 10 000. 20 000. thirty thousand and forty thousand in the end if you want you can total them up total sales for four months hundred thousand so guys sales budget is prepared to prepare sales budget you need to information the number of units you're going to sell in the future months and at what price so if the price is changing in the future months you make the necessary adjustment as soon as sales budget is prepared the next step is to prepare production budget so now I'm going to prepare production budget same number of months you have January February March April here in order to start off with production budget you have to start off with units to be sold production budget starts with this units to be sold and obviously don't take this amount take this amount units we're talking about units not the value of sales so we're talking about 1000 units 2 000 units production budget is all in units okay please remember three thousand and four thousand units better companies what they do is they keep some provision and what is meant by this if 1000 unit sub is to be sold they don't make only one thousand units what if you made 1000 units is sold then what is more customer comes you will be in a stock up position so what better companies do is they make a little more so I'm assuming that the company has a 50 closing stock requirement I am writing here add closing stock which is 50 percent of production which means 1000 units are to be sold so you want to make 1000 if you do that that would be two less we want to have fifty percent of stock even if you have sold one thousand units so 50 of 1000 is 500. which means you want to manufacture 1500 units but wait less opening stock that's the procedure again I am assuming here I'm assuming that we have 200 as opening stock so if you minus this is units to be produced on manufacturers units to be manufactured mfgd is the short form for manufactured please remember there is a particular step sequence order we follow when we're making production budget what is the first step start with units to be sold where you get it from from sales 1000 units to be sold but we will not make only one thousand we make fifty percent extra so 50 of 1000 is 500 which means we want to make 500 units but before making and Manufacturing 500 units let's check our finished goods Warehouse what if we have some finished goods already which are unsold so we found that 200 units we already have which is unsold so out of 1500 200 units is already there we will make 1300 units now it's gonna make sense how many units we are going to make 1300 200 we already have in stock total 1500 from 1500 if we sell 1000 we will be left with 500 units we always want to have some units left after we have sold the required number of units why because that and customers can come anytime okay so I repeat we are making 1300 units 200 units we already have in the Finish store total 1500 out of 1500 how many units you want to sell 1000 and after selling one thousand from 1500 you'll be left with 500 units in case if there is some unexpected audits we will still have 500 units so we'll be able to fulfill the customer's order so let's come to the next month 2000 units the company has a policy of having closing stock equal to fifty percent fifty percent of two thousand is one thousand units so three thousand units we should be making remember the closing stock of January becomes the opening stock of February so if you minus 500 here how many units you should be making 2500 units goes to March 3000 units are to be sold from sales but the company has a policy of 50 closing stock so 50 of this is fifteen hundred so it's four thousand five hundred the closing stock of February becomes the opening stock of March which is one thousand so how many units we'll be making 3500 units going to April 50 of this will be two thousand so this will be six thousand opening closing stock will be the opening stock here so we'll be making 4500 units ladies and gentlemen this is how production budget is made once you have prepared the production budget after that it's up to you do you want to make raw material purchase budget or Labor budget it's up to you so I am preparing raw material purchase budget we have space here same January February March and April okay now I'm preparing raw materials for Chase budget please remember once production budget is made for raw material or labor these are the amounts we are going to use so raw material purchase budget will begin with units to be manufactured mfgd is manufactured or units to be produced or start with production burners how many units 1300. 2500. 3500 4500 now these are units now I'm assuming in order to manufacture one finish unit you require 10 kilograms of raw material so I'm writing here raw material required per unit is 10 kilograms so when you multiply 1300 and then will give you 13 000 kilograms this will give you 25 000 kilograms this will give you 35 000 kilograms and this will give you 45 000 kilograms now this many kilograms you require to make 1300 units it's good to have some Safety stock so I'm assuming the company has a policy of buying more raw material in order to avoid struck out positions so again closing stock requirement closing stock requirement I am assuming that it is at 50 percent of the production requirement in order to make thirteen hundred units you require 13 000 kilograms but fifteen percent of that is 6500 kilograms fifteen percent fifty percent of this will be 12 500 kilograms this will be 17 500 kilogram this will be 22 500 kilograms so when you add this will be nineteen thousand five hundred kilograms this will be thirty seven thousand five hundred kilograms this will be forty two thousand five hundred this will be sixty seven thousand five hundred kilograms this means this many kilograms are to be purchased but wait let's check the raw material Warehouse there is a possibility some raw material is already with us which is unutilized so less opening stock of raw material now I am assuming I am assuming we have 9500 kilograms already there in our uh Warehouse so U minus that so how many kilograms will be purchasing 10 000 kilograms okay so whatever is the closing stock becomes the opening stock here six thousand five hundred so we'll be purchasing 31 500. whatever is the closing stock becomes the opening stock here 12 500. so when U minus okay you'll be buying 30 000 here and whatever is there you write here and you manage so this is in kilograms then I'm writing here cost per kilograms so I'm assuming I'm assuming cost per kilogram is just two dollars okay so you multiply by two dollars so you multiply this by two dollars so ten thousand into two is twenty thousand dollars so this much of raw material in terms of kilograms 10 000 kilograms in terms of value twenty thousand dollars multiply by two sixty three thousand dollars multiply by two sixty thousand so on so now you have prepared raw material purchase budget if you're attending some mcqs an option will be a b c d check if they're asking you to calculate raw material purchase in options a b c d are they asking kilograms or dollars if they're asking kilograms let's say they ask for how many RAM how much of raw material should be purchased in the month of January so you look at January raw material purchase budget and you need to purchase 10 000 kilograms if the answer is in kilograms the answer is 10 000 kilogram if the answer are in dollars then the answer is twenty thousand dollars last operating budget or functional budget is Labor budget as I already explained once production budget is made these amounts will be used to start off with raw material budget and Labor budget look I started raw material with this amount so even if I'm making Labor budget I will use the units to be manufactured amount Labor budget will begin with this amount so I don't have space here I'm making it here Labor budget okay again I have January February let's say March forget April so we begin with units to be manufactured units to be m f g d is manufactured how much I'll pick the units from production budget 1300 2500 3500 1300 units 2500 and 3 500 units question will give you how many labor hours are required to make one unit so next thing you need to know is laborers required per unit so I am assuming 20 laborers 20. 20 laborers so you multiply this will give you 26 000 laborers this will give you fifty thousand laborers this will give you 70 000 laborers you need to pay attention in most of the factories there is a possibility the labels are paid salaries salaries means fixed salaries let's say if I'm working in a company as a laborer I'm given a fixed salary monthly salary and I'm supposed to work eight hours a day out of those eight hours I am busy five hours and three hours I'm idle but I'm paid for eight hours which mean if the company gets additional order which requires two hours I'm available there is no extra labor cost so if one person is idle for three hours there is a possibility company may have 1 000 people working and all of them are ideal for three hours so one thousand into three the idle hours will be three thousand hours so here I am just assuming that the company has some idlers for which they don't have to pay laborers anything so I'm assuming there are some idlers so we will say less idlers let's say six thousand ten thousand and twenty thousand idlers so if you minus for the remaining the labels are to be paid for twenty thousand laborers you have to pay them forty thousand laborers are required for production which is to be paid and 50 000. and if we are paying laborers let's say twenty dollars per hour this is the wage rate so into 20 into 20 into 20. okay this will be four hundred thousand eight hundred thousand and one million so this is your labor cost here again you got to be very careful in examination you may be attempting an McQ where the question would be what is the labor cost to be paid in the month of February so if they ask labor cost that should the answer should be in dollars so if the option A B C D is in dollars you're going to pick 800 000. if the answer ABCD of mcqs in in labor Arts then you are going to choose 40 000 labor hours for February so Guys these were the four functional budgets I hope you have understood if there is any query leave it in the comment section I will reply also let me know from which part of the world you are watching I'm very keen to know where my subscribers are if you're not yet subscribed Please Subscribe my channel press the Bell notification button so that you get my videos on a timely basis if you like this video please share it with your dear and near one so that others can also benefit thank you so very much for your precious time love you all [Music] thank you