Plant Utilization Budget is budget prepared for the estimation of plant capacity to meet the budgeted production during the budgeted period. It is a forecast of plant capacities available for fulfilling production requirements as specified in the production budget. This budget is expressed in working hours or other convenient units.
A budget key factor or principal budget factor is described by the CIMA London terminology as: “a factor which will limit the activities of an undertaking and which is taken into account in preparing budgets”. The limiting factor is usually the level of demand for the products or services of the undertaking but it could be a shortage of one of the productive resources, e.g. skilled labour, raw material or machine capacity. In order to ensure that the functional budgets are reasonably capable of fulfilment the extent of the influence of this factor must first be assessed. As noted already all the functions in all organisations are interlinked. The target of one has influence on that of the other. If the sales department could sell only 50,000 units, it is no use of producing 1,00,000 units. If the production department has the capacity for 50,000 units, sales potential of 1,00,000 units is not of much consequence.
Star luggage limited was established in 1990 and produces a variety of suitcases, cabin bags and holdalls for high street stores. The company has an efficient manufacturing facility comprising two production departments, forming and finishing, and two service departments, Stores and Machine Maintenance. While direct product costs are easily established and recorded, overhead costs attributable are more difficult to ascertain. Currently, the company uses a traditional absorption costing system to assign overheads to its products.
Revision question on budgeting and budgetary control (difference between functional and cash budget)
Denis flynn has just established his company, Df Biscuits limited, and hopes to commence production next month. While he has extensive experience in the food industry, specifically biscuits and confectionery, he has very little management accounting knowledge. To finance his manufacturing operation Denis has applied for a bank loan. However, the bank manager has reviewed the application and is seeking further information. He has asked to see the budget for Df Biscuits limited for the year ahead. In addition, he has also requested a monthly cash budget for the first year of trading. Denis is unsure how to proceed and has asked for your help with this matter.