Cost and Management Accounting 2010 (Solved)

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.