Different Types of Budgets

Budgets are classified according to their nature. The most commonly used budgets are:

On the basis of Time

1. Long-term budgets: This budget have longer perspective which is in the rage of 5 to 10 years. This type of budget is designed at top level. The various areas covered by these budget is research and development, capital expenditure and long-term finance etc.

2. Short-term budgets: This budget is designed for one to two years time period. These types of budgets are used for consumer industry like clothing,beverage,food production,electronics,etc.

3. Current budgets: This budget is generally last from a few weeks to a couple of months. This budget involves current activities. According to I.C.W.A. London,”Current budget is a budget which is established for use over a short period of time and is related to current conditions”.

On the basis of functions/ Functional budgets

1. Operating budgets: These budgets are related to various operation or activities of a firm. Different organizations have different budgets, depending on their organizational structure and process. The most common operating budgets are as follows:

  1. Material budget:  This type of budget deals with raw materials, packing materials and components which are consumed for the purpose of production. It presents quantitative and monetary representation.
  2. Production budget: This budget forms a part of the master budget. It involves determining of future production targets. This budget projects the number of units to be produced for each product.
  3. Sales budget: This budget estimated the expected sales during the budget period. This budget is comprehensive in nature and forms the plan for sales department.
  4. Labour budget: This budget is drawn in conjunction with production budget. Once the production quantity is budgeted,the next step is to calculate the requirement of labour for carrying out production. Tjis budget also projects labour cost by multiplying budget labour hours with wage rate.
  5. Overhead budget: This budget is required for the preparation of production budget. This budget takes care of indirect expenses. It collates the information from various departments.

2. Financial Budgets: This type of budget involves working capital,capital expenditure,cash receipts and disbursement and financial position of the business. Most commonly used financial budget as follows:

  1. Cash budget.
  2. Working capital budget
  3. Income statement budget
  4. Statement of Retained earnings budsget
  5. Budget balanced sheet or position statement budget

3. Master Budget: A master budget is designed by merging several functional budget. According to I.C.W.A. London “The master budget is the summary budget incorporating its functional budget”. This budget s useful for top level management and is used for coordinating the activities of different departments.

On the basis of Flexibility

1. Static or fixed budget: the static budget are designed for a particular level of activity. It is prepared before the beginning of the financial year. This budget is not adjusted in response to actual circumstances. There is generally a gap of more than 12 months between budgeted and actual figures.

2. Flexible Budgets: A flexible budget involves a series of budget dealing with different levels of activities. As suggested by its name,the budget varies according to the level of activities. It classifies various costs into fixed,semi-fixed and variable cost categories.