Types of Budget
In the realm of financial planning, budgets play an important role in managing resources effectively. A budget serves as a blueprint for allocating funds and helps organizations and people to achieve their financial goals. Understanding of various types of budgets is essential for making informed decisions and optimizing financial outcomes.
The budgets are generally classified according to their nature. The following are the types of budgets which are commonly used:
1) On the Basis of Time
i) Long Term Budgets
The budgets are prepared to depict long term planning of the business. The time period of long term budgets varies between five to ten years. The long term planning is done by the top level management; it is not commonly known to lower levels of management. Long time budgets are prepared for some sectors of the concern such as research and development, capital expenditure, long term finances, etc. These budgets are useful for those industries where the gestation period is long i.e., machinery, electricity, engineering, etc.
ii) Short Term Budgets
These budgets are generally for one or two years and are in the form of monetary terms. The consumer’s good industries like sugar, cotton, textile, etc. use short-term budgets.
iii) Current Budgets
The period of current budgets is generally months and weeks. These budgets relate to the recent activities of the business. According to I.C.W.A. London, “Current budget is a budget which is established for use over a short period of time and is related to current conditions”.
2) On the Basis of Functions
i) Operating Budgets
These budgets relate to the different activities or operations of a company. The number of such budgets depends upon the nature and size of the business. The commonly used operating budgets are:
a) Material Budget
Materials budget projects the total quantities and value of each item of rave materials, components and packing materials that will be consumed in the process of producing the budgeted output.
b) Production Budget
The production budget is a component of the master budget that establishes the level of production planned for the budget period. It fixes the target for future output. In a broader sense, the production budget attempts to estimate the number of units of each product that the company is planning to produce during the budget period.
c) Sales Budget
A sales budget is an estimate of expected sales during a budget period. A sales budget is known as the nerve centre or backbone of the enterprise. It lays down a comprehensive plan and programme for the sales department.
d) Labour Budget
The labour budget is largely dependent upon the production budget. Calculation of the total number of hours now takes place. Standard time is determined by time and motion study. The hours are then converted into labour requirements of each department or cost centre. The labour hours multiplied by the rate of wages including allowances will indicate the labour cost.
e) Overhead Budget
This budget helps in the preparation of the Production Budget. All the indirect expenses pertaining to office and administration, production, selling and distribution are shown separately under the budget, and their information is collected from their concerned departments.
The operating budget for a company may be constructed in terms of programmes or responsibility areas, and hence may consist of:
a) Programme Budget
It consists of expected revenues and costs of different products or projects that are termed as the major programmes of the company. Such a budget can be prepared for each product line or project showing costs, revenues, and the relative profitability of the different programmes.
b) Responsibility Budget
When the operating budget of a company is constructed in terms of responsibility areas it is called the responsibility budget. Such a budget shows the plan in terms of the individuals responsible for achieving them. It is used by the management as a control device to evaluate the performance of executives who are in charge of different cost centres.
ii) Financial Budgets
Financial Budgets are concerned with cash receipts and disbursements, capital expenditure, working capital, financial position and results of business operations.
The commonly used financial budgets are:
- Cash Budget,
- Working Capital Budget,
- Capital Expenditure Budget,
- Income Statement Budget,
- Statement of Retained Earnings Budget, and
- Balance Sheet or Position Statement Budget.
iii) Master Budget
Various functional budgets are integrated into the master budget. This budget is designed by the ultimate integration of separate functional budgets.
According to LC.W.A. London, “The Master Budget is the summary budget incorporating its functional budgets”.
The master budget is prepared by the budget officer and it remains with the top level management. This budget is used to coordinate the activities of various functional departments and also to help as a control device.
3) On the Basis of Flexibility
i) Static or Fixed Budget
Static budgets are prepared for a given level of activity; the budget is prepared before the beginning of the financial year. If the financial year starts in January then the budget will be prepared a month or two early, ie., in November or December. The changes in expenditure arising out of the foreseen changes will not be adjusted in the budget. There is a difference of about twelve months between the budgeted and actual figures.
ii) Flexible Budgets
A flexible budget consists of a series of budgets for different levels of activity. It, therefore, varies with the level of activity achieved. A flexible budget is prepared after taking into consideration unforeseen changes in the conditions of the company. A flexible budget is defined as a budget that by recognising the difference between fixed, semi-fixed and variable costs is designed to change in relation to the level of activity.