A budget is a financial statement prepared for a fixed period of time. It includes planned revenues, assets, liabilities, expenses and cash flows.
Classification of Budget
The various types of Budgets have been prepared based on purposes that they serve. These have been classified as follows-
Each of these types can be further divided into various types.
As per time and duration, a budget can be divided into-
Budgets which are developed for a period of 1-2 years as per the nature of a company’s business are known as short-term budgets. This period needs to occur along with the financial accounting period so that the overall performance can be evaluated.
For example- Material Budget, Cash Budget, etc.
This is a methodical and formalized process for controlling the operations of a business for more than a period of 1 year. These budgets are developed for duration of 5-10 years. It proves beneficial for predicting and evaluating the performance of a company for a period of time.
For example- Research and Development, Capital Expenditure Budget, Long Term Finances, etc.
These are financial plans which are created for a short period of time as per the current situation. This can be either for a month or a quarter year.
According to function, a budget can be divided into various types. These are-
This is a financial statement which contains the cash flows for a budget period. The chief accountant of a company creates it either on a weekly basis or monthly basis. It helps in planning payments to employees, installments on income tax and bond redemptions.
This is a prediction of the entire sales volume during a company’s budget period. Prepared by the sales manager, it has information in regard to the sales volume on the basis of area, month and product.
A master budget is a summary of the entire budget package of a business organization. This budget depicts the top authority’s goals regarding expenses, revenue, net income, cash inflows and financial objectives.
Framed by the personnel department of an organization, it gives an estimate of the total hours which is needed to complete the production target. It even includes the total cost incurred for labour in the process of production.
This is an estimate of total quantities of raw materials which needs to be produced for production in a financial period. This budget helps a company to develop effective policy of raw materials.
While preparing material budget, it is essential that factors liked storage facilities, finance availability and market price trends are taken into consideration.
The production budget of an organization is developed by the production manager of a company as per their sales budget. Through this financial plan, a company aims to evaluate the quantity of production for a definite period of time. Thus, it is a statement determining the quantity of production for a budget period.
The capital budgeting of a company is also known as investment decision banking. It forms to be one of the most crucial and difficult problems among all managerial decisions of a company. It is a long term planning for a company’s proposed capital outlay and financing. It is an expense which needs to be incurred not only for the present financial year but for the upcoming 5- 10 years.
Factory Overhead Budget depicts the overall estimate cost of indirect labour, indirect materials and indirect factory expenses that a company will be incurring during a particular financial period. This budget can further divided into-
Sales Manager of Each Territory Has to Prepare a Selling and Distribution Factory Overhead Budget. This budget gives an estimate of the administrative expenses that a company will be incurring during a particular financial period. While preparing this budget, the sales manager often depends upon the company’s sales budget.
This budget is prepared to have an estimate of the administrative costs that an organization during a budget period will be incurring. This reflects an estimate of total administrative expenses that a company will have to bear while achieving the administrative and operational activities.
From the perspective of flexibility, it can be classified into-
Flexible Budget is developed for more than one level of activity. It even acts as asset of alternative budget to various levels of activity in a business. Features of a flexible budget are as follows-
No matter what level of activity or volume of output has been achieved, the fixed budget of a company remains unchanged.
Zero Base Budgeting
Ever since the early 1970’s, the zero base budgeting has become a popular managerial tool. It is a process where all activities are evaluated all over again whenever the budget is formulated. It is a method of reducing costs and optimum utilization of resources.
Defining Zero Base Budgeting
The zero base budgeting can be defined as a process of planning and budgeting where each manager is required to justify about his budget expenses from zero base for every new period. Since it starts from the ‘zero base,’ every function in an organization is evaluated for their needs and costs.
Steps involved in Zero Budgeting
The steps in the process of zero base budgeting-
Step-1: Determining the objectives
Step-2: Verification of extent of the application
Step-3: Identifying the decision making units
Step-4: Analysis of Cost- benefit
Step-5: Preparing Budgets
The performance budget is a type of financial plan which depicts the input of various resources and output of various services for every division in a business organization. This is a tool through which various financial resources are distributed as per objectives and purposes. To make any budget a success, it is important that both performance appraisal and follow-up measures are provided.
Process of Performance Budgeting
Performance Budgeting: Steps