Direct Materials Budget: this budget deals with the requirement and procurement of direct materials: thus, it includes the following two important aspects:

⇒ Preparation of estimates of different types of raw materials needed for various products. ⇒ Scheduling of procuring necessary raw materials in required quantities at required time. The price and quality of raw materials are also considered in materials budget.

(b) Direct Labour Budget: this budget presents an estimate of the requirements of direct labour essential to meet the production targets fixed in production budget. This budget may be classified into labour requirement budget and labour recruitment budget. The labour requirement is estimated on the basis of different grades and different departments and on that basis labour cost is also estimated.

(c) Manufacturing overhead Budget: this budget gives an estimate of works or manufacturing overhead expenses to be incurred in a budget period to achieve the production targets. The budget may be classified into fixed cost, variable cost and semi-variable cost.

(d) Plant Utilization Budget: this budget lays down the level of plant capacity to carry out the production as per production budget. On this basis unutilized capacities in various departments and their alternative uses can also be considered.

Administrative Overhead Budget: is an estimate of the expenses of the central office & management salaries. Mostly administrative overhead budget is fixed. But sometime it changes. When the budget is changed, expenses are determined on the basis of amounts spent in previous year s & the minimum requirement for the efficient operation of each department.

   vii. Selling and Distribution expenses: is the budget of all the expenses relating to selling and distribution of the various products. It includes all the items of expenditure on the promotion, maintenance and distribution of finished products.

Purchase Budget

The purchase budget is another functional budget that estimates the purchase requirement of materials utilized in the production process. The purchase budget is based on the production budget and the standard material consumption requirement for the production estimates.

Zero-based budgeting is a technique of planning and decision-making which reverses the working process of traditional budgeting. In traditional incremental budgeting, departmental managers justify only increases over the previous year budget and what has been already spent is automatically sanctioned. No reference is made to the previous level of expenditure. By contrast, in zero-based budgeting, every department function is reviewed comprehensively and all expenditures must be approved, rather than only increases. Zero-based budgeting requires the budget request be justified in complete detail by each division manager starting from the zero-base. The zero-base is indifferent to whether the total budget is increasing or decreasing.

Advantages of zero-based budgeting1. Efficient allocation of resources, as it is based on needs and benefits.2. Drives managers to find cost effective ways to improve operations.3. Detects inflated budgets.4. Useful for service departments where the output is difficult to identify.5. Increases staff motivation by providing greater initiative and responsibility in decision-

making.6. Increases communication and coordination within the organization.7. Identifies and eliminates wasteful and obsolete operations.8. Identifies opportunities for outsourcing.9. Forces cost centers to identify their mission and their relationship to overall goals.

Disadvantages of zero-based budgeting1. Difficult to define decision units and decision packages, as it is time-consuming and

exhaustive.2. Forced to justify every detail related to expenditure. The R&D department is threatened

whereas the production department benefits.3. Necessary to train managers. Zero-based budgeting must be clearly understood by

managers at various levels to be successfully implemented. Difficult to administer and communicate the budgeting because more managers are involved in the process.

4. In a large organization, the volume of forms may be so large that no one person could read it all. Compressing the information down to a usable size might remove critically important details.

5. Honesty of the managers must be reliable and uniform. Any manager that exaggerates skews the results.