The budget of an enterprise serves the following purposes:

• Budget is an aid in making and coordinating short-range plans.
• It is a device for communicating these plans to the responsibility center managers.
• Budget is a way of motivating managers to achieve their responsibility centers goals.
• It is a bench mark for controlling on-going activities.
• Budget is a basis for evaluating the performance of responsibility centres and their managers.                                      (Any 3)

• Stage 1: Identify the principal budget factor (or key budget factor). The principal budget factor is often sales volume.
• Stage 2: Prepare the functional budget or plan for the principal budget factor. Usually, this means that the first functional budget to prepare is the sales budget.
• All the other functional budgets should be prepared within the limitation of the principal budget factor. For example, even if the company has the capacity to produce more output, it should not produce more than it can sell ( unless it formally decides to increase the size of the finished goods inventory, in which case the production volume will be higher than the sales volume).
• Stage 3: Prepare the other functional budgets, in logical sequence where necessary. When the sales budget has been prepared, a manufacturing organization can then prepare budgets for inventories (=plans to increase or reduce the size of its inventories), a production budget, labour usage budgets and materials usage and purchasing budgets. Expenditure budgets should also be prepared for overhead costs (production overheads, administration overheads and sales and distribution overheads). Overheads costs budgets are usually prepared for each cost centre individually.
• Stage 4: Submit the functional budgets to the budget committee for review and approval. The functional budgets are co-ordinated by the budget committee, which must make sure that they are both realistic and consistent with each other.
• Stage 5: Prepare the ‘master budget’. This is the budget statement that summaries the plans for the budget period. The master budget might be presented in the form of:
  * a budget income statement of the next financial year.
  * a budgeted statement of financial position as at the end of the next financial year.
  * a cash budget or cash flow forecast for the net financial year.
  It should be possible to prepare the master budget statements from the functional budgets.
• Stage 6: the master budget and the supporting functional budgets should be submitted to the board of directors for approval. The board approves and authorises the budget.
• Stage 7: the detailed budgets are communicated to the managers responsible for their implementation.               (Any 6 steps)

‘Master budget’ is a consolidation of the various functional budgets. Budgeted financial statements are prepared on the basis of the master budget. (1 mark)
Usefulness:

• A master budget helps to co-ordinate all other functional budgets and to clarify the short-term objectives of an organization. Department budget are co-ordinate with the master budget which alleviates the conflict between the departmental objectives and the organizational objectives.
• A master budget acts as a line of communication between the various departments.
• A master budget is the basis for planning. Budgeted financial statements are prepared on the basis of a master budget.
• A master budget possesses the targets of all the departments and therefore acts as a basis for performance evaluation.   (Any 2 points for 2 marks)
  Problems:
• The main problem with any budgeting system is that it is based on forecasting and therefore subject to uncertainties.
• Master budget are prepared on the basis of certain assumptions that may not hold true in reality.               (Any 1 point for 1 mark)

‘Functional budgets’ are budgets for individual functions such as sales, purchases, production etc.      (1 mark)
Usefulness:

• Functional budgets give targets to individual mangers.
• As departmental mangers prepare functional budgets, they are more realistic and motivating.                     (2 points for 2 marks)
  Problems:
• As they are prepared by functional mangers, there is the possibility that they may not be in line with the strategic objectives and may conflict with the organizational objective or the objectives of the departments unless they are properly co-ordinate.
• Like any other budget, the functional budgets are also based on forecasts and therefore affected by significant changes in the environment.                                                                                                                         (Any 1 point for 1 mark)