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LOS
§1.B.4.a,
b,c,d,e

Budgeting Systems

Budget Type Sample Purpose Time Frame Application Benefits Limitations

Industry

Master Budget Any Develop a projection of every
aspect of the company’s
revenue and cost flows.
One year or less Starts with the sales budget and •• Communication •• Time to prepare
concludes with full set of pro •• Goal congruence
forma financial statements. The
next six budget systems can be
used to create a master budget.

Project Major Separate budget for each Duration of Project Large projects such as a highway •• Know full cost of project •• Potential conflicts when
Construction project rather than one for an bridge that will generate •• Works for small and large resources and staff are not
entire company. significant revenue and costs projects dedicated to the project
perhaps over several years.

Activity-Based Manufacuring Classify costs based on
activities rather than by
departments or products.
Based on type of Businesses with a complex
budget it’s used for number of products,
departments, or other factors
where traditional broad-brush
costing is not useful.
•• More accurate costing of cost •• Cost to design and
objects maintain the system
•• Focus on an activity’s use of
resources
•• Teamwork

Incremental Education Use the prior-year budget and Based on type of Traditional and efficient way to •• Simple to do •• Budgets tend to only
produce increments into the budget it’s used for develop new budgets based on •• Fosters operational stability increase over time
future based on the prior results prior-year performance. Opposite
and future expectations. of zero-based budgeting.

Zero-Based Government Start the budget cycle from
scratch as if the budgets are
prepared for the first time.
Based on type of Focuses on annual cost
budget it’s used for justification of each item in
the budget. Useful in creating
lean organizations. Requires
in-depth reviews, which can be
time-consuming
•• Focuses on every line item
•• Motivates managers to eliminate
some costs
•• Annual review is time
consuming and expensive
•• By not looking at prior
information, may lose
benefit of a “lesson
learned”

Continuous Start-up Allow the budget to be
(Rolling) continually updated by
removing information for the
period just ended and adding
estimated data for the same
period next year.
One year or less Better reflects current events
and changes in estmates. Helps
accomplish large projects in small
steps. Provides better perspective
than an annual budget.
•• Keeps budgets up-to-date for
operating environment
•• More relevant than budget
prepared once each year
•• Breaks down large process to
smaller steps
•• Encourages long-term
perspective
•• Might need a budget
coordinator
•• Opportunity cost of
manager spending time
each month to develop
the next budget

Flexible Manufacturing Evaluate departmental One year or less Provides detailed variance •• Analysis tool to determine •• Management might lose
Departments performance by comparing analysis to reduce cost, increase detailed variances sight that sales forecast
actual revenue and expenses to output, and improve accuracy of •• Improves future planning was missed
the budgeted amount for the future budgets.
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actual activities.