Classification of Budgets

Classification of Budgets

Classification of Budgets

Functional Budget

Approved targets for individual functions are known as ‘functional budgets’ and consolidation of all budgets constitutes ‘Master Budget

Sales Budget

1.     It is a forecast of total sales.

2.     It is expressed in rupees as well as in quantities.

3.     It considers both external(economy, markets, regulations) & internal (funds, products) factors.

4.     This budget is considered as a key stone of budgeting.

5.     sales budget is the starting point for the preparation of the functional budgets

Purchase Budget:

Purchase Budget gives the details of the purchases which must be made during the budget period. It includes all items of purchase, such as, raw materials, indirect material and other equipmen

1.             Production or delivery target,

2.             Quantity and quality of each material needed,

3.             Present stock position,

4.             The dates on which different quantities of materials are required,

5.             Safety stock,

6.             Orders already placed,

7.             Sources of supply,

8.             Storage space available,

9.             Economic order quantity,

10.          Price to be paid,

11.          Finance available,

12.          Seasonal discounts,

13.          Transport and receiving arrangement,

14.          Management policy etc

Production Budget :-

1.     A forecast of total production

2.     Production value part indicates quantity of products to be manufactured.

3.     Production cost part details manufacturing costs for the period.

4.     Aims at optimum use of resources.

5.     Assists scheduling of factors of production & preparation of delivery schedules

6.     Units to produced= budgeted sales + desired stock- openining stock

Materials Budget :-

1.     A forecast of total material requirements for production

2.     Acts as guide for Purchase department to plan purchases.

3.     Determines various levels of inventory.

4.     Assists Finance to arrange necessary funds

Direct Labour Budget

It is a forecast of total labour requirements for production and is calculated from data of time & grades of workers needed to manufacture  each item, operation, job of budgeted production.

 Using rates of pay, allowances, bonus etc. labour cost budget is computed.

Manufacturing Overhead Budget

the manufacturing overhead budget contains all manufacturing costs other than the costs of direct materials and direct labor (which are itemized separately in the direct materials budget and the direct labor budget). The information in the manufacturing overhead budget becomes part of the cost of goods sold line item in the master budget.

Also, the total of all costs in this overhead budget are converted into a per-unit overhead allocation, which is used to derive the cost of ending finished goods inventory, and which in turn is listed on the budgeted balance sheet. The information in this budget is among the most important of the various departmental budget models, since it may contain a large proportion of the total amount of a company's expenditures.

This budget is typically presented in either a monthly or quarterly format

Administrative Cost Budget :-

1.     Since most of administration expenses are period costs and fixed in nature, this budget is prepared with fewer difficulties.

2.     Once management decisions are finalized these costs get frozen.

Selling Expenses Budget :-

1.     Includes all expenses on promotion, maintenance and distribution of finished products.

2.     Separate budgets normally prepared for fixed and variable parts of expenses.

Research & Development Budget :-

1.     Includes all expenses on projects on hand & new projects approved by the management.

2.     Expenses planned for the budget period are included.

Capital Expenditure Budget:

This budget gives an estimate of the amount of capital that may be needed for acquiring fixed assets required for achieving the production targets as laid down in the production budget. This budget is based on the requisitions for capital expenditure from various departments and after considering their profitability, capital expenditure is sanctioned and incorporated in the budget

Cash Budget :-

1.     A cash forecast is an estimate showing the amount of cash which would available in future period.

2.     One pert contains cash receipts and other disbursements.

3.     Budget is normally prepared on monthly basis

Objectives of Cash Budget -

1. Arrange for finances or investments as per shortage or excess cash balances indicated at end of each month.

2. Coordinate all activities in relation to total working capital, investments, debts etc.

3. Establish sound credit basis for use by banks, financial institutes & creditors.

4. Focus management attention on sudden, seasonal requirements, over stocking or delays in collections etc.

Methods of preparing Cash Budget

Receipts and Payments Method

Adjusted Profits and Loss Method.

Balance Sheet Method.

Receipts and Payments Method

This is the most simple and popular method of preparing cash budget. This method is useful for preparing short term cash budget. Under this method, all expected cash receipts and payments of budget period are considered for preparing cash budge

Accruals and adjustments are ignored while preparing the cash budget by receipts and payments method. The cash budget starts with the opening cash in hand and at bank. All expected cash receipts from various sources such as cash sales, cash collected from debtors, dividends, interest on bonds, proceeds from sale of assets, bank loans, etc., are added to the opening balance of cash Items of expected cash payments such as cash purchases, payment to creditors, payment of expenses, dividends, tax and purchase of fixed assets, etc. whether on capital or revenue accounts, are deducted.

The excess of cash receipts (including opening balance) over cash payments represents closing cash balance at the end of the period and the excess of cash payments over cash receipts would indicate the overdraft requirements.

Adjusted Profit and Loss Method

This method is usually followed in preparing long term cash budgets and it provides lesser details than the receipts and payments method. Under this method, profit and loss account is used as a basis for making the cash forecast. This method is based on the analogy that profit made during the period should increase the cash balance.

While preparing the usual profit and loss account, many items which do not involve cash outlay such as depreciation, transfer to reserves, fictitious assets written off, goodwill written off etc. are subtracted from gross profit. But the amount so subtracted from profit remains in the business. To arrive at the cash balance available at the closing date, these items are added back to the net profit.

Balance Sheet method

This method is also useful for preparing long term cash budgets. Under this method, a budgeted balance sheet is prepared for a certain future period showing all liabilities and assets except cash and bank balances. The cash or bank balance is arrived at as the balancing figure of the two sides of the balance sheet. If the liabilities side is more than the assets side, the excess is taken as closing cash on hand or at bank. If the assets side is heavier than the liabilities side, the difference is considered as overdraft. The main defect of this method is that it ignores the items of income and expenditure. The second defect is that the exact cash position shall be known only when the balance sheet is prepared at the end of the year

Master Budget :-

1.     A consolidated summary of all functional budgets.

2.     Its approval signifies approval of all other budgets which then can be employed.

3.     In a sense it is a budgeted profit & loss account and balance sheet of a firm.

4.     This budget is prepared by the budget committee.

5.     It provides a scientific base to compute effect of any change in operations like sales volume, product mix, prices, labour costs, material costs, or change in facilities

6.     Master budget is a summary of all the functional budgets and shows the overall budget plan

A master budget is the summary budget incorporating its component as functional budgets and which is finally approved, adopted and employed

This budget commonly summarizes functional budgets to produce a budgeted Profit and Loss Account and a budgeted Balance Sheet at the end of the budget period.

Fixed Budget :-

1.     This budget remains unchanged irrespective of the level of activity actually attained.

2.     Useful for a short period where volumes remain unchanged or for expenses of fixed nature.

 Have limited application and cannot be used as a toll for cost control.

3.     A fixed budget, also called a static budget,

4.     fixed budget as the budget which is designed to remain unchanged irrespective of the level of activity actually attained

Flexible Budgets :-

1.     This budget recognizes different cost behaviour patterns, is designed to change as volume of output changes.

2.     Budgeted costs are available for any level of activity and hence this type of budget has wide application.

Flexible Budgets are desirable under these circumstances –

1.     When the level of activity changes during a year.

2.     Business is new & demand is difficult to predict.

3.     Where there is a shortage of materials, labour or plant capacity.

Features of Flexible Budgets –

1.     Flexible Budgets are prepared for a range of activity rather than a single level.

2.     Flexible Budgets provide a very dynamic basis for comparison with actual performance

3.     Tailor made budget available for actual volume achieved.

4.     Flexible Budgets are based on full knowledge of cost behavior

There are three methods of preparation –

1.     Tubular method or multi-activity method.

2.     Formula or ratio method.

3.     Graphic Method

Various Types of Budgets based on time :-

1.     Current Budget : a budget related to the current conditions and for use over a short period.

2.     Long-Term Budget : a budget prepared for a period exceeding one year. This budget is very useful for forward planning & capital expenditures.

3.     Short-Term Budget : a budget prepared for a period less than a year. This budget is very useful for junior levels of management for control purposes