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Classification of Budget.

This document discusses different types of budgets used in accounting and business planning. It describes short term and long term budgets, classified according to time period. It also describes different functional budgets like sales, research and development, and master budgets. Budgets can also be classified as fixed or flexible according to the level of activity. A flexible budget is preferable as it allows for variation in production levels and facilitates performance evaluation.

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524 views9 pages

Classification of Budget.

This document discusses different types of budgets used in accounting and business planning. It describes short term and long term budgets, classified according to time period. It also describes different functional budgets like sales, research and development, and master budgets. Budgets can also be classified as fixed or flexible according to the level of activity. A flexible budget is preferable as it allows for variation in production levels and facilitates performance evaluation.

Uploaded by

EverlyChua
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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Budget

Classifications

Classification According to Time


Short Term Budget
May cover periods of three to twelve months
depending upon nature of business.
Should be long enough to allow completion of a
season or all aspects of a business.
The period should
accounting period to
performance.

coincide
facilitate

with financial
evaluation of

Long Term Budget


A systematic and formalized process for directing &
controlling operations for period extending beyond one year.
It evaluates future implications associated with present
decisions.
Market trends, change in demographics, national income,
etc. play important role in preparing long term budget.
It proves useful in forecasting and evaluation of an
organization over period of time.

Classification of Budget According to Function


Sales Budget
The most important budget, all other budgets are
contingent upon.
Production budget, selling and distribution, etc. are affected
by sales budget.

Sales forecasting:

Developing a sales budget requires forecasting future


sales, which depends upon three main factors:
1. Information concerning past performance.
2. Information about present conditions within industry
and sales territory and
3. Data concerning the industry and general business
conditions.

Research and Development Budget


A tool for planning and controlling research and
development costs.
Helps in coordination with companys other plans and
projects.
Helps allocation of funds for Research and Development
by coordinating companys immediate and long-term plans.
Helps in planning staff and equipment requirements for
Research and Development.

Master Budget
It is summary or total budget package for a business firm.
It can be called end product of budget making process.
It reveals the top managements goals of revenues,
expenses, net income, cash inflows and financial positions.
Takes the macro view of business and coordinates with
production, raw materials, manpower and other resources
with production targets.
It cuts across divisional boundaries to coordinate firms
diverse activities.
The operating budgets constitute the building block used to
complete the master budget

Classification of Budget According to Function


Fixed Budget
Fixed budget is designed to remain unchanged irrespective
of the level of the activity actually attained.
It is based on single level of activity.
It compares data from actual operations with single level of
activity reflected in budget.
Fixed budget is good for performance measurement, if
output can be estimated within close limits.

Flexible Budget
It is prepared for a range, for more than one level of activity.
It is a set of alternative budgets to different levels of activity.
Flexible budget is prepared considering that a business is
dynamic, ever changing and never static.
Important features of flexible budget:
It covers a range of activity.
It is easy to change with variation in production levels.
It facilitates performance measurement and evaluation.

Advantages of Flexible budgeting:


1. Accurate budgeting: Output factor is considered while
preparation, since cost of goods may fluctuate time to time.
2. Coordination: Production is planned in relation to expected
sales, materials and labor are acquired to meet expected
production requirements.
3. Control tool: Comparison between the budgeted costs and
actual costs form basis for analyzing cost variances and
fixing responsibility for same. This motivates managers to
feel themselves motivated in controlling costs for which they
are responsible.

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