AccountingBudgeting

Different Types of Budgets in Finance and Accounting

Classification of Budgets

Budgets can be classified on the basis of functions involved, according to the time, according to the nature of transactions and according to activity levels.

(A) Functional Classification of Budgets

Budgets can be prepared on a functional basis also. When individual budgets are associated with a particular function and are integrated with the Master Budgets attic business, they are called functional budgets. Such main budgets are follows

(1) Sales Budget : The sales budget is a forecast of total sales classified according to group of products that are expected to be sold in what quantity and at what prices. A sales budget is generally regarded as the keystone of budgeting. It reflects the expected revenue from sales and cash receipts from customers.

(2) Production Budget: It is a forecast of budgeted production based on sales, productive capacity and requirements of inventories etc.

(3) Production Cost Budget : It is a forecast of cost of production including direct material cost, direct labor cost and other overheads- fixed, variable and semi-variable. This production cost budget can be sub-divided into Materials Requirement Budget, Direct Labor Budget, Factory overheads Budget and Office and Administrative overheads budgets etc. Material Budget is also known as purchase budget.

(4) Personnel Budget : It is a budget of personnel inventory hence it would automatically include labor employed in productive capacity.

(5) Research and Development Budget : This budget relates to the improvement in the quality of the products of research for new products.

(6) Cash Budget: It is one of the important budgets. It is a sum-total of the requirements of cash in respect of various functional budgets as well as of anticipated cash receipts.

(7) Capital Budget: It is forecast of outlay on fixed assets as also the sources of capital required.

(8) Master Budget : It is an integrated budget prepared from the separate functional budgets.

(9) Other Functional Budgets: There may be other functional budgets also, for example, selling and distribution cost budget. Administrative overhead budget etc.

(B) Classification of Budgets according to Time:

According to time or period, the budgets may be broadly of the following three types

1) Long-term Budgets : Such budgets are prepared with a long ten view. They are concerned with planning the Operations of a firm over five ti ten years. They are prepared generally in the form of physical quantities.

(2) Short-term Budget : Such budget is prepared for a period of one a two years, it is generally in the shape of a short-term production plan.

(3) Current Budgets: Such budgets are prepared fora very short period for example one month, one quarter or a season and so on.

(C) Budgets according to Nature of Transactions

On the basis of nature of transactions, budgets may be divided into two categories :-

(1) Operating Budget : Operating budget is frequently known as revenue budget or income and expense budget also. It relates to the entire operations of the firm. The budget lays down the estimated net profit, operating profits, and profit appropriations for the budget period. Operating budget is the life blood of budgeting system which depicts the over-all policies and plans of the firm , covering a definite period. There are two main components of the operating budget-sales budget and expense budgets.

(2) Capital Budgets : These are related to the capital structure and liquidity of the enterprise. These include working capital budget. Annual cash budget, Budgeted Equity Capital, and Loan Capital, Budgeted Investments in Fixed Assets etc.

(D) Budgets according to Activity Levels

Budgets according to activity levels may be of two types –

(1) Fixed Budget : It is budget in which targets are rigidly fixed. This is a forecast of the targets for the coming year prepared well in advance, sometimes even two and three months before the year. These targets are used as a standard yardstick to measure actual performance. Though a fixed budget can also be revised, whenever the necessity arises, but generally their nature is of static character.

(2) Flexible Budget : It is also known as a Variable Budget. If the costs in a responsibility center are expected to vary with the volume of production, as is the case with most production departments, the flexible budgets must be prepared. Such a budget shows the expected behavior of costs at various volume levels. This is a variable budget possesses a distinct advantage over the fixed budget, particularly where it is difficult to forecast sales, costs and expenses with exact or greater accuracy.

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