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-
- On the basis of time
- On the basis of function
- On the basis of flexibility
Each of these types can be further divided into various types.
- On the basis of time
As per time and duration, a budget can be divided into-
- Short term Budget
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.
- Long Term Budget
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.
- Current Budget
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.
- On the basis of Function
According to function, a budget can be divided into various types. These are-
- Cash Budget
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.
- Sales Budget
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.
- Master Budget
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.
- Labour Budget
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.
- Materials Budget
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.
- Production Budget
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.
- Capital Expenditure Budget
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
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-
- Fixed factory overhead budget
- Semi- Variable factory overhead project
- Variable factory overhead project.
- Selling and Distribution Overhead Budget
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.
- Administrative Expenses 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.
- On the basis of Flexibility
From the perspective of flexibility, it can be classified into-
- Flexible Budget
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-
- Covers a wide range of activities
- Evaluates and measures the performance in an organization.
- Easy modification with variation in production level.
- Fixed Budget
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
- Deciding about the goal and objective
- Framing a set of programmes to accomplish the goal and implement it.
- Evaluating the performance of each segment and assessing their contribution in the achievement of the goal.
Performance Budgeting: Steps
- Determining the objectives of the department or company.
- Identifying the projects to help the company achieve its objectives.
- Evaluating the projects as per their benefits.
- Selecting analysis of cost benefit for optimum utilization of funds.
- Developing performance criteria
- Preparing financial plans
- Developing the annual budget
- Assessing the performance of each project as per the budget.