CLASSIFICATION OF BUDGETS
Budgets are classified according to their nature. The following ae
the different classifications of budgets.
A) Classification
according to time
a) Long-term
budgets
b) Short-term
budgets
c) Current
budgets
B) Classification based on functions
a) Functional
or subsidiary budgets
b) Master
budget
C) Classification on
the basis of flexibility
a) Fixed
budget
b) Flexible
budget
A) Classification
on the basis of Time
a) Long-term Budgets:
Long-term budgets are prepared to reflect long-term planning of the business. Generally,
the long-term period varies between five to ten years. They are prepared by the
top level management. Long-term budgets are prepared for specialised activities
like capital expenditure, research and development, long-term finances, etc.
b) Short-term Budgets:
These budgets are generally for a duration of one year and are expressed in
monetary terms.
c) Current Budgets:
The duration of current budgets is generally in months and weeks. These budgets
are prepared for the current operations of the business. As per I.C.M.A.
London, ‘current budget is a budget which is established for use over a short
period of time and is related to current conditions”.
B) Classification
on the basis of functions
a) Functional Budgets:
These budgets relate to various functions of the concern. Following are the
commonly prepared functional budgets:
i.
Purchase Budget
ii.
Cash budget
iii.
Production budget
iv.
Sales budget
v.
Materials budget
b)
Master
Budget: This budget is a summary of various functional budgets. It
encompasses the activities of the whole organisation. According to I.C.M.A.,
London “The master budget is the summary budget incorporating its functional
budgets”. Master budget is prepared to coordinate the activities of various
functional departments.
C) Classification
on the basis of flexibility
a) Fixed
Budget: it is prepared for a given level of activity and remains same
irrespective of change of activity.
b) Flexible
budget: It is a budget prepared for various levels of activity by
classification of expenditure under fixed, variable and semi fixed categories.
Some Important Budgets Prepared by Various Functional Managers:
a) Sales
Budget: In the budgeting process, sales is a starting point, as sales is the
key factor in many cases. W.W.Bigg Writes, “This is probably most important
budget, as it is usually the most difficult of forecast to attain”.
b) Production
Budget: This budget is based on sales budget, unless production itself is the
key-factor. It shows the budgeted quantity of output to be produced during a
specific period. It has two parts, one showing the output for the period and
the other showing production costs. The following key elements are considered
while preparing the production budget.
c) Materials
Budget: This budget is prepared in coordination with production budget.
Preparation of materials budget is useful and helpful in achieving continuous,
uninterrupted production as the non-availability of materials at the right time
can affect the production. Material budget consists of two parts, one is the
consumption budget and another is materials purchase budget.
d) Labour
budget: Labour budget is also a part of production budget. Labour budget is
prepared by the personnel department. This budget consists of the following
details:
a. Number
of different grades of workers required
b. Rates
of wages of workers
c. Labour
hours needed for production.
d. Labour
cost for the period, etc.
e) Overhead
budget:
a. Production
overhead budget: It is a budget of indirect costs in the form of indirect
wages, indirect material and indirect expenses to be incurred in the factory.
It is prepared with the help of production, and labour budgets. It is prepared
on the basis of past year’s figures and future changes expected.
b. Administration
overhead budget: This budget is prepared to estimate the expenditure to be
incurred for planning, organising, direction and control functions of the
management. The budget is based on the past year’s expenditure incurred with expected
future changes.
c. Selling
and distribution overhead budget: This budget is prepared to estimate
expenditure to be incurred to sell the product and is distribution. It is based
on sales budget. It is generally prepared in consultation with sales managers
of each territory.
d. Research
and Development Budget: This budget is prepared to estimate the research and
development expenditure to be incurred during specific period. The budget is
prepared in two parts, one is for revenue expenditure and another is to
estimate the capital expenditure to be incurred.
f)
Capital Expenditure Budget: This budget is prepared to estimate
the capital expenditure on fixed assets- Buildings, machinery, plant,
furniture, etc. It is generally a long-term budget. It is prepared for
replacement of assets, expansion of production facilities, adoption of new technologies,
diversification, etc.
g)
Cash Budget: Cash budget is an important budget. It estimates the
amount of cash receipts and payments and the balance of cash during a specific
budget period. The cash budget is based on forecasts of cash or estimates of
cash showing what funds would be available at what times and whether the funds
available would meet requirements. The objective of cash budget is to provide
for all cash requirements in time and avoid accumulation of excess cash.