Types of budgets

TYPES OF BUDGETS

Nandagopal PPRN: 100

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BudgetA budget is a detail plan of operations

for a specific period of time.

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Essentials of a BudgetIt is prepared in advance and is based

on future plan of action.It relates to a future period and is

based on objectives to be attained.It is a statement expressed in

monetary or physical unit prepared for the formulation of policy.

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Types of BudgetsOn the basis of functionality On the basis of flexibility On the basis of period

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Functional BudgetSales budgetProduction budgetMaterial budgetLabour budgetManufacturing overhead budgetAdministrative expenses budgetSelling and distribution budgetCash budget

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Sales BudgetSales budget is the primary budget. Other budgets are prepared on the

basis of sales budget.Forecast the future expected sales of

the firm.Based on product, type of customers,

salesman, locality.Past sales, sales man estimates, plant

capacity, raw material, orders in hand, seasonal fluctuations, competition are taken into consideration.

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Production BudgetSchedule of production is prepared by

breaking large production in small units to fulfill the target production.

A properly operated budget leads to inventory control, improved maintenance of production schedules and production targets.

If the estimated opening stock is 5000 units and estimated sales are 25000 units and closing stock of the product is 3000 units the estimated production will be 25000 + 3000 – 5000 =23000 units.

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Material BudgetMaterials are basically divided into two

categories as direct and indirect material. It includes the preparation of estimates of

different types of the raw material needed for various products and purchasing raw material in required number at a required time.

Requirement of raw material, company’s stocking policies, price trend, and cost of raw material are few factors to be considered.

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Labour BudgetLabour requirement budgets are

prepared on basis of production budget.

In this budget company has to budget the required number of hours and the expected pay scales of the employees.

This budget gives information about personnel specifications for the job for which workers are to be recruited, the degree of skill and experience required and rates of pay.

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Manufacturing overhead BudgetsThis budget gives the work overhead

expenses to be incurred in a budget period to achieve the production target.

The cost of indirect material and indirect labour can be calculated with the help of this budget.

Variable expenses are estimated on the basis of the budgeted output because these expenses are bound to change with the change in output.

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Administrative expenses BudgetThe budget covers the expenses

incurred in framing policies, directing the organization and controlling the business operations.

In this budget an estimate of expenses is prepared regarding central office and of management salaries.

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Selling and Distribution BudgetsThis budget is used to plan for

the expected selling and distribution expenses of the firm.

Cost of transportation, salesman salaries etc. are few examples.

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Cash BudgetPredict the inflow and outflow of cash

during the budget period.Cash sales, credit collection and other

receipts in cash payments are considered.

A cash budget makes provision for a minimum cash balance which will be available at all times.

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Master BudgetThe master budget is the aggregation

of all lower-level budgets produced by a company's various functional areas, and also includes budgeted financial statements, a cash forecast, and a financing plan.

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Budgets based on Flexibility Fixed budgetFlexible budget

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Fixed BudgetThis is the rigid budget and it is drawn

on the assumption that there will be no change in the budgeted time period.

A fixed budget will be helpful only when actual level of activity is equal to budgeted level of activities.

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Flexible BudgetIt is also called as variable budget. A flexible budget gives different

budgeted costs for different budgeted costs for different levels of activities.

This budget is applicable in where activity levels vary from period to period.

The business is new and it is difficult to predict, industry is influenced by change in fashion, where there are changes in sales.

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On the basis of Time Period Long term Short Term

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Long term BudgetLong-term budgets are prepared

for those organizations, which deal in regular product line.

Here organizations are not suppose to change their proceedings in short time periods.

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Short term BudgetShort term budgets are prepared

for short time periods which work for seasonal product line.

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References Cost Accounting by Jawahar Lal

and Seema Srivastava.Cost and Management

Accounting by Colin Drury. Cost Management by Hilter,

Maher and Selto

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THANK YOU

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