The functional budget is one that relates to any of the functions of an organization. The number of functional budgets depends upon the size and nature of business. The following are the commonly used:
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.