CHAPTER TWO BUDGETING TYPES OF BUDGET Generally, budgets are classified on the basis of: 1.

Level of activity; (i) (ii) Fixed budget, and Flexible budget

2. On the basis of types of expenditure: (i) (ii) Capital expenditure budget, and Operating budget

A FIXED BUDGET: it is prepare on the basis of certain fixed predetermined level of activity. In the fixed budget certain fixed monetory allowances are made which do not vary along with the changes in the conditions. Fixed budgets are suitable only for such enterprises whose quantity and quality of production as well as sales during the budget period can be predetermined with reasonable accuracy. The government budgets are mostly fixed budgets. FLEXIBLE BUDGET: these reflex the actual behaviour characteristics of the cost. Flexible budget segregate the cost into two parts: those cost which vary with the passage of time those which vary with the volume of

production. The forma are fixed costs (e.g. Salary of executive) and the later are variable costs (eg cost of direct materials). Thus, on like fixed budget, the flexible budget assumes that the cost will vary with the volume of activity. The flexible budget makes varying allowances for the different levels of operating conditions, say budget are 50%, 60, 75, 90, and 100% level of operating conditions. CAPITAL EXPENDITURE BUDGET. Capital expenditures are those expenditure the benefit from which are deferred over a longer period of time, e.g. purchase of equipment, machinery, plant etc. the expenditure on such items are relatively higher and the benefits are derived till the economy (estimated) life of such assets. Such expenses result into creation of assets and are shown in balance sheet of the company. Capital expenditure budgets are prepared for the purchase of new assets or for the replacement of existing assets. The budget period is generally longer as compared to operating budget, usually 3 to 5 years or even more. OPERATING BUDGET. Operating budget are usually prepared on the annual basis and there are broken into still shorter time-spans say, have, yearly, quarterly, monthly etc. The following are the important types of operating budget 1. sales budget

2. production budget 3. special budget 4. Master budget. PREPARATION OF THE BUDGET For budget preparation following condition must be made: 1. A budget committee consisting of representatives from all the concern departments should be formed. A budget officer is appointed as coordinator. 2. The budget should distinctly mark the responsibilities of each section of the business. 3. A budget, as a plan of future action, is base on estimate of sales, cost, estimated business condition etc. therefore, care should be taken to prepare the estimate accurately. 4. The budget should be made flexible so that unavoidable charges may be incorporated whenever necessary. This is because, business conditions always change with time. For instance, employees change, produces change, taste change and economic condition change with time. It is therefore necessary to revamp continuesly the budgetary procedure to cop with this changing condition.

5. To prepare good budget, it is essential to know about the business policies, the budget should be prepare considering the effect from each department. 6. while preparing the budget all the information regarding cost are essential (i.e. manufacturing cost, margin of profit etc) 7. Effort should be made to implement the budget at all levels of management for its effective application. SALES BUDGET In business, many budgets are prepared. Business produces today and sales tomorrow. The quantity to be produced is naturally determined by the estimate of sales (probable sales) in future. Therefore, the sales budget is prepared first. The sales budget is a plan of future sales. These budget gives the income from the products likely to be sold and sale expenditure. Sale budget is prepared on the basis of past sales and the reports received from the sales man, who will give approximate quantity of products likely to be sold in his area, forecast of the market and general business conditions.

Sale expenditure budget is prepared by estimating the expenses on advertisement, market analysis, sales mens salaries, office expenses etc. for the budget period. MANUFACTURING/CONSTRUCTION BUDGETS The manufacturing budget is prepared by considering the sales demand and capacity of the plant. It shows the estimated quantities of the products to be manufactured during particular periods , for example, a month, year etc. manufacturing budget shows the schedule of production and meets the requirement of sales budget. The comparison between the production budget estimate an actual production rate tell the management about the relative performance of the production department. If the actual production fall short of budgeted production, the management finds out the reasons; fixes the responsibilities of short falls and takes corrective action. The aims of manufacturing budget are (i) (ii) (iii) (iv) To meet the sales requirements. To secure economical manufacture. To secure maximum utilization of production facilities. To obtain perfect coordination in their working relationship.

THE FINANCIAL BUDGET Financial budget gives the estimates of expected income and expenditure. The financial budget forecasts the profit and lost statement and the financial position of the concern at the end of budget period. This budget is prepared for the use of top management to know the profitability of a budgetary programme. In the light of this budget, management has to arrange for cash or finances for meeting the production and sales requirements.

REFERENCE Dilworth J. B. (1992) Operations Management, McGraw Hill, Inc. N. Y. http://telecollege.dcccd.edu/mgmt1374/book_contents/1overview/m anagement_skills/mgmt_skills.htm http://www.amanet.org/books/book.cfm?isbn=9780814408940 http://changingminds.org/explanations/theories/a_motivation.htm http://www.acu.ac.uk/policyandresearch/publications/ACU_chapter6. pdf http://www.nicci.co.uk/filestore/documents/members-news-andevents/Teamwork_Components.pdf