Types Of Budget
The budget period is the period of time for which the budget is prepared and used. In most cases, the period of time chosen is the accounting period of the organisation, since this period is usually sufficiently long to take care of seasonal variations that would occur in production and sales. In certain industries, which are characterised by significant seasonal variation, a shorter period of six-months or a quarter may be found more useful. In industries involving large capital outlay and long production cycles such as, shipbuilding or generation of electricity, the budget period is likely to extend beyond one accounting year. Generally, a Master Budget is prepared, which in turn, is broken into functional budgets. Budgets may be classified as follows:
A basic budget is based on a long term plan and is used as a basis for developing current budgets. A basic budget is much broader in scope and less detailed than a current budget. It may be fixed or flexible. The basic data are not updated whenever there are changes in conditions, such as, increase in material price or wage rates. As a result, the use of basic budgets obscures operating variances. That is why for control purposes, current budgets are more useful.
Current budget is established for use over a short period of time, usually one year but sometimes even less, and related to current conditions, that is, average conditions which are likely to prevail during the budget period.
A Fixed Budget is designed to remain unchanged irrespective of the volume of output or turnover attained. The budget remains fixed over a given period and does not change with the change in the volume of production or level of activity attained. Normally, such a budget is prepared in respect of expenses of a fixed nature. As such, this budget is of limited practical application.
A Flexible Budget by recognising the difference in behaviour between fixed and variable costs in relation to fluctuation in output or turnover, is designed to change appropriately with such fluctuations. A flexible budget changes according to the levels of activity.
Master Budget and Functional Budgets
A Master Budget is prepared from, and summarises, the various functional budgets. It is also called summary budget. It is a summary plan of the overall activities of the enterprise for a definite future period. It generally includes details relating to production, sales, stocks, debtors, cash position, fixed assets, etc. in addition to important control ratios. A functional budget is a budget of income or expenditure appropriate to or the responsibility of a function, such as, production, sales, purchase, etc.