The policy of a business for a defined period is represented by the master budget, the details of which are given in a number of individual budgets called functional budgets.
These functional budgets are broadly grouped as physical, cost and profit budgets.
Those budgets which contains information in terms of physical units about sales, production etc.
for example, the number of sales, quantity of production, inventories and manpower budgets are physical budgets.
Budgets which provides cost information in respect of manufacturing, selling, administration etc.
for example, manufacturing cost, selling cost, administration cost and research and development cost budgets are cost budgets.
Budgets which enables in the ascertainment of profit, for example, sales budget, profit and loss budget, etc.
Types of Budget
- Fixed Budget.
- Flexible Budget.
- Master Budget.
- Functional Budget.
- Long Term Budget.
- Short Term Budget.
- Current Budget.
A fixed budget is a budget designed to remain unchanged irrespective of level of activity actually attained. Such a budget is suitable for Fixed Expenses. It is also known as a Static budget.
A fixed budget is not suitable in a dynamic environment and for a longer period because of its rigidity. It is not suitable where labour cost, material cost, and other factors are constantly changing.
Flexible budget show the expected results of responsibility centre for several activity level. Flexible budget is the series of static budgets for different level of activity.
While preparing flexible budget the revenues and expenses are classified into Fixed, Variable and Semivariable categories.
In most cases, the level of activity during the period varies from period to period due to changes in demand or seasonal nature, or changing circumstances. In such industries/ government organizations flexible budget is suitable.
Budgets which relate to the individual function/task in an organisation are known as Functional Budgets.
For example, purchase budget, sales budget, production budget, plant utilization budget, cash budget.
It is a consolidated summary of the various functional budgets. It is based on goals set. It serves as the basis upon which budgeted P & L A/c and forecasted Balance Sheet are built up.
The budget which are prepared for periods longer than a year are called long-term budget. Such budgets are helpful in business forecasting and strategic planning. E.g. Capital expenditure budget, Research and Development budget.
Budgets which are prepared for periods less than a year are known as short term budgets. E.g. Cash Budget.
Such budgets are prepared regular comparison and action to bring variation under control.
A budget that is established for use over a short period of time and is related to the current conditions is called the current budget