Types of budgets

Types of Budget

Budgets can be classified into 2 types

1. Master Budget, and
2. Functional Budgets.

 

Master Budget

The final integration of all functional budgets by the Budget Officer provides the Master Budget.

When functional budgets have been completed, the Budget Officer prepares the Master Budget.

Master Budget is the summary budget incorporating its component functional budgets, which is finally approved, adopted and employed.

Master Budget shows the operating profit of the business for the budget period and budgeted balance sheet at its close. This Budget portrays the overall plan for the budget period.

The master budget consists of several separate but interdependent budgets. The first step in the budgeting process is the preparation of the sales budget, which is a detailed schedule showing the expected sales for the budget period. An accurate sales budget is the key to the entire budgeting process.

If the sales budget is inaccurate, the rest of the budget will be inaccurate. The sales budget is based on the company’s sales forecast, which may require the use of sophisticated mathematical models and statistical tools.

The sales budget helps determine how many units need to be produced.

Thus, the production budget is prepared after the sales budget. The production budget, in turn, is used to determine the budgets for manufacturing costs including the direct materials budget, the direct labor budget, and the manufacturing overhead budget.

These budgets are then combined with data from the sales budget and the selling and administrative expense budget to determine the cash budget.

A cash budget is a detailed plan showing how cash resources will be acquired and used. After the cash budget is prepared, the budgeted income statement and then the budgeted balance sheet can be prepared.

 

Functional Budgets

Functional Budgets relate to functions of the business such as product sales etc. In other words, Functional Budgets are prepared in respect of various functions performed in a business.

Functional Budgets which are commonly found in a business concern are as follows;

1. Sales Budget;
2. Production Budget;
3. Material Budget;
4. Labor Budget;
5. Production Overhead Budget;
6. Administration Overhead Budget;
7. Selling & Distribution Overhead Budget;
8. Plant Utilization Budget;
9. Cash Budget
10. Research & Development Budget and more.

 

Purposes of a Budget

The budget serves the following purposes:

• Budget is an aid in making and coordinating short-range plans.
• It is a device for communicating these plans to the responsibility center managers.
• Budget is a way of motivating managers to achieve their responsibility centers goals.
• It is a bench mark for controlling on-going activities.
• Budget is a basis for evaluating the performance of responsibility centres and their managers.
• It is a means of educating the managers in an organisation.
• Under suitable condition, standard costing and budgetary control may go hand in hand and can harmonies and make the planning and control more effective.