Saturday, March 19

Budget Classification

In every business planning, the preparation of budget is the most important function to perform. Planning of different organizations depend upon so many factors because of various types of goods produced and services rendered.

Planning is done for the purpose of comparing the actual performance with standard performance in order to correct any deviation that may arise at the end of productivity.

Therefore, budget as a financial plan that contains the list of all planned expenses and incomes prepared and approved prior to a defined period of time of the policies to pursue during the period, can be classified based on time period (i.e. short-term, long-term and medium-term budget), activity perspective (i.e. operating, financial and master budget), quantitative perspective (i.e. surplus, deficit and balanced budget) and functional budgets (i.e. sales, purchases, production, cash, operating expenses, opening and closing inventory, direct labour, selling and distribution, income statement, balance sheet, static/fixed and flexible budgets).

Different Forms of Budget Classification Based On Various Factors

1. Time Perspective Budget:

This is a type of budget which relates to the organizational development or its business over many years. It is usually drawn up in any general terms which cover the nature of the business.

The duration of long-term budget is between three to ten years and it includes among other things such matters like purchase of capital assets, issue of share capital and debenture, etc.

This is a type of budget formulated to relate to any financial or non-financial budgets and it is prepared to cover the period between one to five years and has a period of thirteen months as the floor and a period fifty nine months as the ceiling.

This type of budget is related to current conditions and is a budget which usually covers a period of one year.

2. Activity Perspective Budget

This is an overall financial and operating plan for a forthcoming calendar or fiscal year. It is usually prepared annually or quarterly. It is really a number of sub-budgets tied together to summarize the planned activities of the business.

This type of budget examines the expected assets, liabilities and stockholders’ equity of the business. It is needed to see the company’s financial health. It is synonymous with capital expenditure in government circle.

This budget reflects day-to-day activities or operations of an organization which deal with the costs from merchandise or services produced. It is synonymous with recurrent expenditure in government circle.

3.     Quantitative Perspective Budget

This type of budget arrives at when the total estimated revenue is greater than the total estimated expenditure.

This is a clear reversal of surplus, it is arrived at when more expenditure is incurred than the revenue generated.

This type of budget means that the total revenue generated and the total expenditure incurred are equal. That is, there is break-even.

4.     Functional Budget

This is a primary budget. It is the most important budget to prepare and the other budgets are prepared on the basis of sales budget. In this budget, the in-charge or experts forecast the future expected sales of firm.

It is prepared on the basis of product, type of consumers, salesman, locality, etc. and also shows the quantities of each product that the organization plans to sell and the intended selling price for each product.

After the preparation of sales budget, this is the next budget to prepare. In this budget, work/production manager prepares schedule of production by breaking large production in small units (expressed in quantities only) in order to ensure that production is sufficient to meet sales demand and that economic stock level are maintained.

This type of budget is for cash planning and control. It presents expected cash inflow and outflow for a designated time period. It helps the management keep cash balances in reasonable relationship to its needs and aids in avoiding idle cash and possible cash shortages.

This refers to all business running expenses which are expected to be incurred in the budget period. The budget may be prepared either on weekly, monthly, quarterly, half yearly or on an annual basis.

This is also prepared in the same format of a balance sheet. The preparation of budgeted balance sheet could be in format meant for either internal or external use depending on available information.

It gives a summary of total assets and liabilities of the organization.

This is budgeted figures at the expected capacity level. Allowances are set forth for specific purposes with monetary limitations. It is used when a company is relatively stable.

Stability usually refers to sales. The problem with a static budget is that it lacks the flexibility to adjust to unpredictable changes.

This is a budget which recognizes the existence of fixed, variable and semi-variable costs, and it is designed to change in relation to the actual level of activity of a period.

In industry, fixed budgets are appropriate for those departments whose workload does not have a direct current relationship to sales, production, or some other volume determinants related to the department’s operations. The work of the departments is determined by management decision rather than by sales volume.

In conclusion, budget classification may take different forms depending on the type of organization, factors of production, nature of products, nature of business, organizational activities, period of carrying out business activities, quantity of goods produced and/or services rendered by an organization, and economic or social or geographical or political situation of an economy.

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I hope you have found this write-up helpful. Feel free to share other types of budget you know via comment box, and spend four seconds to share this article with your loved ones on social media.

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