4/21/2021 3 Types of Budgets Prepared in Budgetary Control | Financial Analysis

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3 Types of Budgets Prepared in

Budgetary Control | Financial
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The following points highlight the three types of budgets

Prepared in budgetary control, i.e, (A) Classification
According to Time, (B) Classification on the Basis of
Functions, and (C) Classification on the Basis of Flexibility.

(A) Classification According to Time:

1. Long Term Budget:

The budgets are prepared to depict long term planning of the

business. The period of long term budgets varies between five to ten
years. The long term planning is done by the top level management; it
is not generally known to lower levels of management. Long time
budgets are prepared for some sectors of the concern such as capital
expenditure, research and development, long term finances, etc.
These budgets are useful for those industries where gestation period is
long i.e., machinery, electricity, engineering, etc.

2. Short-Term Budget:

These budgets are generally for one or two years and are in the form
of monetary terms. The consumers goods industries like sugar, cotton,
textile, etc. use short-term budgets.

3. Current Budget:
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The period of current budgets is generally of months and weeks. These

budgets relate to the current activities of the business. According to
I.C.W.A. London, “Current budget is a budget which is established for
use over a short period of time and is related to current conditions.”

(B) Classification on the Basis of Functions:

1. Operating Budget:

These budgets relate to the different activities or operations of a firm.

The number of such budgets depends upon the size and nature of
business.

The commonly used operating budgets are:

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(a) Sales Budget

(b) Production Budget

(c) Production Cost Budget

(d) Purchase Budget

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(e) Raw Material Budget

(f) Labour Budget

(g) Plant Utilization Budget

(h) Manufacturing Expenses or Works Overhead Budget

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(i) Administrative and Selling Expenses, Budget, etc.

The operating budget for a firm may be constructed in terms

of programmes or responsibility areas, and hence may
consist of:

(i) Programme Budget, and

(ii) Responsibility Budget.

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(i) Programme Budget:

It consists of expected revenues and costs of various products or

projects that are termed as the major programmes of the firm. Such a
budget can be prepared for each product line or project showing
revenues, costs and the relative profitability of the various
programmes. Programme budgets are, thus, useful in locating areas
where efforts may be required to reduce costs and increase revenues.
They are also useful in determining imbalances and inadequacies in
programmes so that corrective action may be taken in future.

(ii) Responsibility Budget:

When the operating budget of a firm is constructed in terms of

responsibility areas it is called the responsibility budget. Such a
budget shows the plan in terms of persons responsible for achieving
them. It is used by the management as a control device to evaluate the
performance of executives who are in charge of various cost centres.
Their performance is compared to the targets (budgets), set for them
and proper action is taken for adverse results, if any. The kinds of
responsibility areas depend upon the size and nature of business
activities and the organisational structure.
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However, responsibility areas may be classified under three

broad categories:

(a) Cost/Expense Centre

(b) Profit Centre

(c) Investment Centre.

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We have discussed the concept and technique of responsibility

budgeting in detail under a separate chapter on ‘Responsibility
Accounting’ latter in this book.

2. Financial Budget:

Financial budgets are concerned with cash receipts and

disbursements, working capital, capital expenditure, financial position
and results of business operations.

The commonly used financial budgets are:

(a) Cash Budget

(b) Working Capital Budget

(c) Capital Expenditure Budget

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(d) Income Statement Budget

(e) Statement of Retained Earnings Budget

(f) Budgeted Balance Sheet or Position Statement Budget. Privacy - Terms

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3. Master Budget:

Various functional budgets are integrated into master budget. This

budget is prepared by the ultimate integration of separate functional
budgets. According to I.C.W.A. London, “The Master Budget is the
summary budget incorporating its functional budgets”. Master budget
is prepared by the budget officer and it remains with the top level
management. This budget is used to co-ordinate the activities of
various functional departments and also to help as a control device.

(C) Classification on the Basis of Flexibility:

1. Fixed Budget:

The fixed budgets are prepared for a given level of activity, the budget
is prepared before the beginning of the financial year. If the financial
year starts in January then the budget will be prepared a month or
two earlier, i.e., November or December. The changes in expenditure
arising out of the anticipated changes will not be adjusted in the
budget.

There is a difference of about twelve months in the budgeted and

actual figures. According to I.C.W.A. London, “Fixed budget is a
budget which is designed to remain unchanged irrespective of the
level of activity actually attained.” Fixed budgets are suitable under
static conditions. If sales, expenses and costs can be forecasted with
greater accuracy then this budget can be advantageously used.

2. Flexible Budget:
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A flexible budget consists of a series of budgets for different level of

activity. It, therefore, varies with the level of activity attained. A
flexible budget is prepared after taking into consideration unforeseen
changes in the conditions of the business. A flexible budget is defined
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as a budget which by recognizing the difference between fixed, semi-

fixed and variable cost is designed to change in relation to the level of
activity.

The flexible budgets will be useful where level of activity changes from
time to time. When the forecasting of demand is uncertain and the
undertaking operates under conditions of shortage of materials,
labour etc., then this budget will be more suited.

Illustration 1:

The expenses for the production of 5,000 units in a factory

are given as follows:

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Illustration 2:

The following information at 50% capacity is given. Prepare

a flexible budget and forecast the profit or loss at 60%, 70%
and 90% capacity.

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Illustration 3:

The following information relates to a flexible budget at 60%

capacity. Find out the overhead costs at 50% and 70%
capacity and also determine the overhead rates:

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TABLE OF CONTENTS

(A) Classification According to Time:

(B) Classification on the Basis of Functions:
(C) Classification on the Basis of Flexibility:

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