Classification of Budget | Cost Accountancy

The following points highlight the four types of classification of  budget. The types are: 1. On the Basis of Time 2. On the Basis of Function 3. On the Basis of Flexibility 4. On the Basis of Nature of Business Activity.

Classification of Budget: Type # 1.

On the Basis of Time:

According to time, budgets may be classified as:

(i) Long-term Budget,

(ii) Short-term Budget, and

(iii) Current Budgets.

(i) Long-term Budgets:

Long-term budgets are prepared on the basis of long-term forecasts. It portrays a long range planning which extend from five to ten years. This is the reason that these budgets are prepared in terms of physical quantities rather than in rupee values.

(ii) Short-term Budgets:

Short-term budgets are those, which are prepared on the basis of short-term forecasts i.e. for a period of one to five years. These budgets are prepared in monetary units and are more precise than long-term budgets.

(iii) Current Budgets:

These budgets are prepared for a period that extends from one month to twelve months.

Classification of Budget: Type # 2.

On the Basis of Function:

Budgets for a period may also be classified according to the functions carried on in a business concern. The various functions of a business concern are interrelated. The various forecast of individual function are coordinated and then constipated to show the total effect of all the functions. Therefore, budget for individual function is prepared and then a master budget is prepared consolidating all functional budgets.

Thus budgets on the basis of functions may be:

(i) Master Budget or Summary Budget;

(ii) Functional Budgets or Subsidiary Budgets.

(i) Master Budget or Summary Budget:

The Master Budget is one that projects the activities of the business during the budget period. It commonly takes the form of budgeted Profit and Loss Account and Balance Sheet. It is prepared by the Budget Officer, and incorporates the details shown in the subsidiary budgets.

Master Budget that consolidates an organisation’s overall plans for a shorter span of time is usually prepared on an annual basis. The Master Budget is an integrative tool that cuts across divisional boundaries to, coordinate the firm’s diverse activities. A Master budget takes the macro view of the business enterprise and coordinates sales with production, raw materials, manpower, machinery and other resources.

The following exhibit shows the Master Budget of a non-manufacturing concern:

The Master Budget—the Overall Plan:

Master Budget, in a broader sense, is a summary budget incorporating all financial budgets in a capsule form. From this view point, master budget depicts the picture of total plans of the budget period, and it covers information relating to sales, production, costs, profit and profit planning etc.

(ii) Functional Budgets or Subsidiary Budgets:

Functional budgets are those that are prepared on the basis of approved forecasts for individual department. These functional budgets may vary in number from business to business.

Normally, the following types of functional budgets are in vogue:

(a) Sales Budget,

(b) Production Budget,

(c) Raw Material Budget,

(d) Labour Budget,

(e) Plant Budget,

(f) Research and Development Budget,

(g) Overheads Budget,

(h) Financial Budgets—Cash Budget, Capital Budget and Expenditure Budget.

Classification of Budget: Type # 3.

On the Basis of Flexibility:

(i) Fixed Budget and

(ii) Flexible Budget.

(i) Fixed Budget:

Fixed Budget are prepared for a fixed or standard volume of activity. They do not change with the change in the volume of activity. These budgets are prepared well in advance. They are not helpful for making comparison.

According to I.C.M.A. “a fixed budget is a budget designed to remain unchanged irrespective of the level of activity actually attained”.

Fixed budget is normally prepared when activities can fairly be forecast with reasonable certainty.

(i) Flexible Budget:

The I.C.M.A. defines flexible budget as, “a budget which is designed to change in accordance with the level of activity attained”. Basically, the idea of a flexible budget is that there shall be some standard of expenditure for varying levels of output.

Flexible budgetary control has been developed with the objective of changing the budget figures progressively to correspond to the actual output. The preparation of budgets necessitates the analysis of all overheads into fixed, variable and semi- variable costs.

The I.C.M.A. defines the above costs as follows:

Fixed cost: a cost which tends to be unaffected by variation in volume of output.

Variable cost: a cost that tends to vary directly with the volume of output.

Semi-variable: a cost which partly fixed and partly variable.

Classification of Budget: Type #  4.

On the Basis of Nature of Business Activity:

On the above view point, budgets may be classified as:

(i) Operating Budgets or Revenue Budgets

(ii) Capital Expenditure Budgets

(i) Operating Budgets:

Operating budgets are those that deal with the plans for routine activities, i.e., operations. These budgets are prepared on the basis of forecasts made in respect of routine activities like sales, production, costs, revenues etc.

(ii) Capital Expenditure Budgets:

All budgets that are related to the plans aiming at creating manufacturing facilities are known as capital expenditure budgets. These budgets are very significant for the large and progressive manufacturing concerns.

It represents estimated expenditure on all fixed assets during the budget period. It should be noted, however, that the budget period in the case of capital expenditure budget might differ from that of other budgets. This budget is subject to strict management control, because it may involve large amount of expenditure that needs top-management’s approval.