Classification based on functions (functional/subsidiary budgets, master budgets)

Classification based on functions is another way to categorize budgets. Here are the two main types based on their functions within an organization:

1. Functional/Subsidiary Budgets: Functional or subsidiary budgets are created for specific functions or departments within an organization. These budgets focus on the detailed financial plans and activities of individual departments, such as sales, marketing, production, human resources, and administration. Functional budgets are prepared based on the specific requirements and goals of each department. They provide a breakdown of revenues, expenses, and resources allocated to each department, enabling managers to monitor and control their financial performance. Functional budgets are typically consolidated into the master budget.
2. Master Budget: The master budget is an integrated and consolidated budget that brings together all the functional/subsidiary budgets of an organization. It provides a comprehensive view of the organization’s financial plans and performance. The master budget includes the operating budget, capital expenditure budget, cash budget, and other relevant budgets. It serves as a primary financial planning and control tool, enabling management to assess the overall financial position, set targets, allocate resources, and monitor the organization’s performance against the planned objectives. The master budget is typically prepared for a specific time period, such as a fiscal year, and serves as a benchmark for evaluating the financial performance of the organization.

The functional/subsidiary budgets and the master budget are interconnected. The functional budgets provide the detailed plans and targets for individual departments, while the master budget consolidates and aligns these individual budgets into a cohesive financial plan for the entire organization. This classification allows for better coordination and control of financial activities within the organization, as it ensures that the goals and objectives of each department are integrated into the overall financial strategy.