Budget Types: Types of Budgets in Accounting

The following points highlight the types of budgets used in accounting. The types are: 1. Sales Budget 2. Production Budget 3. Materials Budget 4. Labour Budget 5. Overhead Budget 6. Research and Development Budget 7. Capital Expenditure Budget 8. Cash Budget 9. Master Budget 10. Flexible Budget.

Type # 1. 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”.

Owler & Brown in Wheldon’s Cost Accounting and Costing Methods say, “This is probably the most difficult functional budget to prepare”.

The problem with preparation of sales budget lies in correct forecasting and estimation of sales quantity, and this will be more complicated, if the sales budget is to be done for a new product. If forecasts or estimations go wrong, all other functional budgets which are based on the sales budget including the master budget also go wrong.

The sales budget shows quantity of finished products to be sold and price at which they are to be sold.

Sales budget may be prepared in five different ways:

(a) Product-Wise:

Budget to estimate sales quantities of each product.

(b) Territory-Wise:

In territory wise sales budget sales quantities and values are estimated for each territory.

(c) Period-Wise:

It is a budget prepared to show sales targets monthly, quarterly, half-yearly or for a period of one year.

(d) Customer-Wise:

Different categories of customers are to be finalised and then for each class of customers a budget is prepared. This budget is helpful when special discounts are to be offered or special terms are offered.

(e) Salesmen-Wise:

This basis is helpful for preparation of budgets when sales are made through salesmen or agents regionally and each salesman accounts for a significant portion of total sales.

The sales budget is generally prepared by the sales manager of the concern. This budget is prepared by taking general factors into account like policies relating to the prices, economic situation, intensity of competition, substitutes for the products, discounts and other terms and offers made.

The sales budget includes:

(a) Sales quantities

(b) Territory-wise or area-wise analysis

(c) Cost of sales promotion, and

(d) Methods adopted for increasing sales.

Type # 2. 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:

(i) Production Planning:

In production planning the utilisation of plant, wastage, defectives, spoilages, bottlenecks in production like shortage of materials, men and power, etc., are considered in deciding the quantity to be produced.

(ii) Volume or Quantity of Output:

Production budget determines the targets of quantity to be produced during a period.

(iii) Quantities of Stocks:

While deciding the volume of production the opening and closing stocks are to be taken into account.

(4) Coordination with Sales Budget:

Sales budget is the basis for preparing production budget.

Preparation of effective production budget is helpful in-

(a) Minimization of wastage, spoilage, defectives,

(b) Avoidance of overstocking,

(c) Production of required quantities at the right time as per schedule.

Type # 3. 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.

Material consumption budget is prepared on the basis of production budget.

Materials purchase budget is prepared on the basis of material consumption budget. It also takes into account the opening stock of materials and desirable closing stocks.

Type # 4. 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:

(1) Number of different grades of workers required

(2) Rates of wages of workers

(3) Labour hours needed for production, and

(4) Labour cost for the period, etc.

Type # 5. 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, and 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 its distribution. It is based on sales budget. It is generally prepared in consultation with sales managers of each territory.

Type # 6. Research and Development Budget:

This budget is prepared to estimate the research and development expenditure to be incurred during a 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.

Type # 7. 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.

Type # 8. 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.

Type # 9. Master Budget:

A comprehensive master budget is prepared for the entire organisation, by integrating all the functional budgets of a period. The master budget is an overall plan for the guidance of the management. I.C.M.A., England, defines it as “summary budget incorporating its component functional budgets which is finally approved, adopted and employed”.

Thus it is a combined budget summarising all the other budgets. It is in a way a combined Profit and Loss Account and Balance Sheet prepared in advance. Master budget is prepared by the budget committee and it remains with the top level management. This budget is helpful in coordinating activities of various functional departments.

Procedure for Preparing Master Budget:

The master budget preparation has certain sequential steps to be followed as listed below:

Step I:

Preparation of sales budget is the preliminary step for preparing the master budget. The sales budget usually determines the scope of operations of a firm.

Step II:

Preparation of production budget is the second step in preparation of the master budget. This helps in estimating the material required and labour hours and machine hours necessary for production.

Step III:

Cost of production budget presents various elements .of cost of production. This helps in estimating the cash requirements.

Step IV:

Preparation of cash budget is the Fourth step. This budget estimates the cash required for payments and the different sources of funds to be mobilised.

Type # 10. Flexible Budget:

I.C.M.A., London defines a flexible budget as “a budget which, by recognising the difference between fixed, semi-variable and variable costs is designed to change in relation to the level of activity attained”.

Flexible budget is prepared to know the costs at different levels of activity. It is also termed as ‘variable budget’ or ‘sliding scale budget’.

Steps Involved in Preparing Flexible Budget:

After completing the above mentioned preliminary steps, the following are the steps in preparing a flexible budget:

(1) Classification of Cost:

The cost is classified according to variability as variable cost, fixed cost and semi variable cost.

(2) Estimation of Variable Cost:

Variable cost comprises of all those costs which vary in direct proportion to the level of activity. Usually, all the direct costs and variable portions of the indirect costs are combinedly called ‘variable cost’.

(3) Estimation of Fixed Costs:

All those expenses which remain constant irrespective of the level of activity are the fixed costs. They usually include all the fixed portion of the overheads. The total of such expenses has to be estimated.

(4) Estimation of Semi-Variable Cost:

It remains fixed upto a particular level of capacity and there after it increases if the activity level goes up further. The semi variable cost should be estimated for the chosen activity levels.

Presentation of Flexible Budget:

The flexible budget can be presented in the following forms:

(1) In Tabular Form:

This is the most commonly used method. Under this method costs are classified under fixed variable and semi variable. These costs are estimated for different levels of activity.

(2) In Graph Form:

Here also expenses are classified as under tabular form and presented on a graph sheet.

(3) In the Form of Ratios:

This method is used by concerns with standard lines of business and the expenses are uniform. The expenses are expressed in terms of ratios or percentages of production. The ratios are generally expressed in terms of percentages for any level with a variation of 10%, say 70%, 80%, 90% and 100%, etc.