BUDGETING AND ITS TYPES

BUDGETING AND ITS TYPES

A budget is a quantitative expression of a plan for a defined

period of time. It may include planned sales volumes and revenues,
resource quantities, costs and expenses, assets, liabilities and cash
flows. It expresses strategic plans of business units, organizations,
activities or events in measurable terms. International Budget
Partnership regularly monitors global budget information for the civil
society.

ETYMOLOGY

A budget (derived from old French word bougette, purse) is a quantified

financial plan for a forthcoming accounting period.

BUDGETING AND ITS TYPES

Microeconomics, which uses a budget line to illustrate the trade-offs between

two or more goods. In other terms, a budget is an organizational plan stated in
monetary terms.

PURPOSE

Budget helps to aid the planning of actual operations by forcing managers to

consider how the conditions might change and what steps should be taken now and by
encouraging managers to consider problems before they arise.
It also helps co-ordinate the activities of the organization by compelling managers
to examine relationships between their own operation and those of other departments.

Other essentials of budget include:

To control resources

To communicate plans to various responsibility center managers.

To motivate managers to strive to achieve budget goals.

To evaluate the performance of managers

To provide visibility into the company's performance

For accountability

In summary, the purpose of budgeting tools:

BUDGETING AND ITS TYPES

1. Tools provide a forecast of revenues and expenditures, that is, construct a

model of how a business might perform financially if certain strategies, events
and plans are carried out.
2. Tools enable the actual financial operation of the business to be measured
against the forecast.
3. Lastly, tools establish the cost constraint for a project, program, or operation.

CORPORATE BUDGET

The budget of a company is often compiled annually, but may not be a

finished budget, usually requiring considerable effort, is a plan for the short-term
future, typically allows hundreds or even thousands of people in various departments
(operations, human resources, IT, etc.) to list their expected revenues and expenses in
the final budget.

If the actual figures delivered through the budget period come close to the
budget, this suggests that the managers understand their business and have been
successfully driving it in the intended direction. On the other hand, if the figures
diverge wildly from the budget, this sends an 'out of control' signal, and the share
price could suffer. Campaign planners incur two types of cost in any campaign: the
first is the cost of human resource necessary to plan and execute the campaign. the
second type of expense that campaign planners incur is the hard cost of the campaign
itself.

Event management budget

BUDGETING AND ITS TYPES

A budget is a fundamental tool for an event director to predict with a

reasonable accuracy whether the event will result in a profit, a loss or will break-even.
A budget can also be used as a pricing tool.

There are two basic approaches or philosophies, when it comes to budgeting.

One approach is telling you on mathematical models, and the other on people.

The first school of thought believes that financial models, if properly

constructed, can be used to predict the future. The focus is on variables, inputs and
outputs, drivers and the like. Investments of time and money are devoted to perfecting
these models, which are typically held in some type of financial spreadsheet
application.

The other school of thought holds that its not about models, its about people.
No matter how sophisticated models can get, the best information comes from the
people in the business. The focus is therefore in engaging the managers in the
business more fully in the budget process, and building accountability for the results.
The companies that adhere to this approach have their managers develop their own
budgets. While many companies would say that they do both, in reality the investment
of time and money falls squarely in one approach or the other.

GOVERNMENT BUDGET

The budget of a government is a summary or plan of the intended revenues

and expenditures of that government. There are three types of government budget :

BUDGETING AND ITS TYPES

the operating or current budget, the capital or investment budget, and the cash or cash
flow budget.[4]

There are two types of control, namely budgetary and financial. This chapter
concentrates on budgetary control only. This is because financial control was covered
in detail in chapters one and two. Budgetary control is defined by the Institute of Cost
and Management Accountants (CIMA) as:

"The establishment of budgets relating the responsibilities of executives to the

requirements of a policy, and the continuous comparison of actual with budgeted
results, either to secure by individual action the objective of that policy, or to provide
a basis for its revision".

OBJECTIVES

An indication and explanation of the importance of budgetary control in marketing

as a key marketing control technique

An overview of the advantages and disadvantages of budgeting

An introduction to the methods for preparing budgets

An appreciation of the uses of budgets.

Structure of the chapter

BUDGETING AND ITS TYPES

Of all business activities, budgeting is one of the most important and, therefore,
requires detailed attention. The chapter looks at the concept of responsibility centres,
and the advantages and disadvantages of budgetary control. It then goes on to look at
the detail of budget construction and the use to which budgets can be put. Like all
management tools, the chapter highlights the need for detailed information, if the
technique is to be used to its fullest advantage.
Budgetary control methods
a) Budget:
A formal statement of the financial resources set aside for carrying out specific
activities in a given period of time.
It helps to co-ordinate the activities of the organisation.
An example would be an advertising budget or sales force budget.
b) Budgetary control:
A control technique whereby actual results are compared with budgets.
Any differences (variances) are made the responsibility of key individuals who can
either exercise control action or revise the original budgets.
Budgetary control and responsibility centres;
These enable managers to monitor organisational functions.
A responsibility centre can be defined as any functional unit headed by a manager
who is responsible for the activities of that unit.
There are four types of responsibility centres:
a) Revenue centres
Organisational units in which outputs are measured in monetary terms but are not
directly compared to input costs.

BUDGETING AND ITS TYPES

b) Expense centres
Units where inputs are measured in monetary terms but outputs are not.
c) Profit centres
Where performance is measured by the difference between revenues (outputs) and
expenditure (inputs). Inter-departmental sales are often made using "transfer prices".
d) Investment centres
Where outputs are compared with the assets employed in producing them, i.e. ROI.
Advantages of budgeting and budgetary control
There are a number of advantages to budgeting and budgetary control:
Compels management to think about the future, which is probably the most
important feature of a budgetary planning and control system. Forces management to
look ahead, to set out detailed plans for achieving the targets for each department,
operation and (ideally) each manager, to anticipate and give the organisation purpose
and direction.
Promotes coordination and communication.
Clearly defines areas of responsibility. Requires managers of budget centres to be
made responsible for the achievement of budget targets for the operations under their
personal control.
Provides a basis for performance appraisal (variance analysis). A budget is basically
a yardstick against which actual performance is measured and assessed. Control is
provided by comparisons of actual results against budget plan. Departures from
budget can then be investigated and the reasons for the differences can be divided into
controllable and non-controllable factors.
Enables remedial action to be taken as variances emerge.
Motivates employees by participating in the setting of budgets.

BUDGETING AND ITS TYPES

Improves the allocation of scarce resources.

Economises management time by using the management by exception principle.
Problems in budgeting
Whilst budgets may be an essential part of any marketing activity they do have a
number of disadvantages, particularly in perception terms.
Budgets can be seen as pressure devices imposed by management, thus resulting in:
a)

bad

labour

relations

b) inaccurate record-keeping.
Departmental conflict arises due to:
a)

disputes

over

resource

allocation

b) departments blaming each other if targets are not attained.

It is difficult to reconcile personal/individual and corporate goals.
Waste may arise as managers adopt the view, "we had better spend it or we will lose
it". This is often coupled with "empire building" in order to enhance the prestige of a
department.
Responsibility versus controlling, i.e. some costs are under the influence of more than
one person, e.g. power costs.
Managers may overestimate costs so that they will not be blamed in the future
should they overspend.
Characteristics of a budget
A good budget is characterised by the following:
Participation: involve as many people as possible in drawing up a budget.

Comprehensiveness:
Standards:

base

Flexibility:

it

embrace
on
allow

the

whole

established

standards

for

changing

organisation.
of

performance.
circumstances.

BUDGETING AND ITS TYPES

Feedback:

constantly

monitor

performance.

Analysis of costs and revenues: this can be done on the basis of product lines,
departments or cost centres.
Budget organisation and administration:
In organising and administering a budget system the following characteristics may
apply:
a) Budget centres: Units responsible for the preparation of budgets. A budget centre
may encompass several cost centres.
b) Budget committee: This may consist of senior members of the organisation, e.g.
departmental heads and executives (with the managing director as chairman). Every
part of the organisation should be represented on the committee, so there should be a
representative from sales, production, marketing and so on. Functions of the budget
committee include:
Coordination of the preparation of budgets, including the issue of a manual

Issuing

of

timetables

for

Provision

of

information

to

preparation
assist

of

budget

budgets
preparations

Comparison of actual results with budget and investigation of variances.

c) Budget Officer: Controls the budget administration The job involves:
liaising between the budget committee and managers responsible for budget
preparation

dealing

with

ensuring

budgetary
that

control

deadlines

problems
are

met

educating people about budgetary control.

d) Budget manual:
This document:

charts
details

the
the

organisation
budget

procedures

BUDGETING AND ITS TYPES

contains

account

codes

for

items

of

timetables

expenditure

and

revenue

the

process

clearly defines the responsibility of persons involved in the budgeting system.

Budget preparation
Firstly, determine the principal budget factor. This is also known as the key budget
factor or limiting budget factor and is the factor which will limit the activities of an
undertaking. This limits output, e.g. sales, material or labour.
a) Sales budget: this involves a realistic sales forecast. This is prepared in units of
each product and also in sales value. Methods of sales forecasting include:

sales

force

opinions

market
statistical

methods

(correlation

research

analysis

and

examination

of

trends)

mathematical models.
In using these techniques consider:

company's
general

pricing

economic

changes

and

policy

political

in

the

population

conditions
competition

consumers'
advertising

and

income
other

and

sales

after

promotion

sales

tastes
techniques
service

credit terms offered.

b) Production budget: expressed in quantitative terms only and is geared to the sales
budget. The production manager's duties include:

analysis

of

work-in-progress budgets.
If requirements exceed capacity he may:

plant

utilisation

BUDGETING AND ITS TYPES

subcontract

plan

for

introduce

hire

overtime
shift

or

buy

work

additional

machinery

The materials purchases budget's both quantitative and financial.

c) Raw materials and purchasing budget:

The

materials

usage

budget

is

in

quantities.

The materials purchases budget is both quantitative and financial.

Factors influencing a) and b) include:

production

planning

requirements
stock

levels

storage

space

trends of material prices.

d) Labour budget: is both quantitative and financial. This is influenced by:

production

requirements

man-hours
grades
wage

of
rates

available
labour
(union

required
agreements)

the need for incentives.

e) Cash budget: a cash plan for a defined period of time. It summarises monthly
receipts and payments. Hence, it highlights monthly surpluses and deficits of actual
cash. Its main uses are:
to maintain control over a firm's cash requirements, e.g. stock and debtors
to enable a firm to take precautionary measures and arrange in advance for
investment and loan facilities whenever cash surpluses or deficits arises
to show the feasibility of management's plans in cash terms

BUDGETING AND ITS TYPES

to illustrate the financial impact of changes in management policy, e.g. change of

credit terms offered to customers.
Receipts of cash may come from one of the following:

cash

sales

payments

the

sale

the

issue

by

debtors

of
of

fixed

assets

new

shares

the receipt of interest and dividends from investments.

Payments of cash may be for one or more of the following:

purchase

payments

of

purchase

of
wages
of

stocks

or

other

expenses

capital

items

payment of interest, dividends or taxation.

Steps in preparing a cash budget
i) Step 1: set out a pro forma cash budget month by month. Below is a suggested
layout.

Cash receipts

Receipts from debtors

Sales of capital items

Loans received

Month 1

Month 2

Month 3

BUDGETING AND ITS TYPES

Proceeds from share issues

Any other cash receipts

Cash payments

Payments to creditors

Wages and salaries

Loan repayments

Capital expenditure

Taxation

Dividends

Any other cash expenditure

Receipts less payments

Opening cash balance b/f

Closing cash balance c/f

ii) Step 2: sort out cash receipts from debtors

iii) Step 3: other income
iv) Step 4: sort out cash payments to suppliers
v) Step 5: establish other cash payments in the month

BUDGETING AND ITS TYPES

Figure 4.1 shows the composition of a master budget analysis.

Figure 4.1 Composition of a master budget

OPERATING BUDGET

FINANCIAL BUDGET

consists of:-

consists of

Budget P/L acc: get:

Cash budget

Production budget

Balance sheet

Materials budget

Funds statement

Labour budget

Admin. budget

Stocks budget
f) Other budgets:
These include budgets for:

administration
research
selling

and
and

distribution

capital

working capital (debtors and creditors).

The master budget (figure 4.1) illustrates this. Now attempt exercise 4.1.
Exercise 4.1 Budgeting I

development
expenses
expenditures

BUDGETING AND ITS TYPES

Draw up a cash budget for D. Sithole showing the balance at the end of each month,
from the following information provided by her for the six months ended 31
December 19X2.
a) Opening Cash $ 1,200.

19X2

Sales

at

19X3

$20 MAR APR MAY JUN JUL AUG SEP OCT NOV DEC JAN FEB

per unit

260

200 320

290 400 300 350 400 390 400 260 250

Cash is received for sales after 3 months following the sales.

c) Production in units: 240

270 300 320 350 370 380 340 310 260 250

d) Raw materials cost $5/unit. Of this 80% is paid in the month of production and
20% after production.
e) Direct labour costs of $8/unit are payable in the month of production.
f) Variable expenses are $2/unit. Of this 50% is paid in the same month as production
and 50% in the month following production.
g) Fixed expenses are $400/month payable each month.
h) Machinery costing $2,000 to be paid for in October 19X2.
i) Will receive a legacy of $ 2,500 in December 19X2.
j) Drawings to be $300/month.
An example

BUDGETING AND ITS TYPES

A sugar cane farm in the Lowveld district may devise an operating budget as follows:

Cultivation

Irrigation

Field

maintenance

Harvesting

Transportation.
With each operation, there will be costs for labour, materials and machinery usage.
Therefore, for e.g. harvesting, these may include four resources, namely:
Labour:
-cutting
-sundry

Tractors

Cane

trailers

Implements and sundries.

Having identified cost centres, the next step will be to make a quantitative calculation
of the resources to be used, and to further break this down to shorter periods, say, one
month or three months. The length of period chosen is important in that the shorter it
is, the greater the control that can be exercised by the budget but the greater the
expense in preparation of the budget and reporting of any variances.
The quantitative budget for harvesting may be calculated as shown in figure 4.2.
Figure 4.2 Quantitative harvesting budget

Harvesting

1st quarter

2nd quarter

3rd quarter

4th quarter

nil

9,000 tonnes

16,000 tonnes

10,000 tonnes

Labour

Cutting

BUDGETING AND ITS TYPES

Sundry

nil

300 man days

450 man days

450 man days

Tractors

nil

630 hours

1,100 hours

700 hours

Cane trailers

nil

9,000 tonnes

16,000 tonnes

10,000 tonnes

Imp, & sundries

nil

9,000 tonnes

16,000 tonnes

10,000 tonnes

Each item is measured in different quantitative units - tonnes of cane, man days etc.and depends on individual judgement of which is the best unit to use.
Once the budget in quantitative terms has been prepared, unit costs can then be
allocated to the individual items to arrive at a budget for harvesting in financial terms
as shown in table 4.2.
Charge out costs
In table 4.2 tractors have a unit cost of $7.50 per hour - machines like tractors have a
whole range of costs like fuel and oil, repairs and maintenance, driver, licence, road
tax and insurance and depreciation. Some of the costs are fixed, e.g. depreciation and
insurance, whereas some vary directly with use of the tractor, e.g. fuel and oil. Other
costs such as repairs are unpredictable and may be very high or low - an estimated
figure based on past experience.
Figure 4.3 Harvesting cost budget

Item

Unit cost

harvesting

1st

2nd

3rd

4th

quarter

quarter

quarter

quarter

6,750

12,000

7,500

Total

Labour

Cutting

$0.75
tonne

per -

26,250

BUDGETING AND ITS TYPES

Sundry

$2.50

per -

750

1,125

1,125

3,000

per -

4,725

8,250

5,250

18,225

per -

1,350

2,400

1,500

5,250

per -

2,250

4,000

2,500

8,750

$15,825

$27,775

$17,875

$61,475

day

Tractors

$7.50
hour

Cane Trailers

$0.15
tonne

Imp.
sundries

& $0.25
tonne

So, overall operating cost of the tractor for the year may be budgeted as shown in
figure 4.4.
If the tractor is used for more than 1,000 hours then there will be an over-recovery on
its operational costs and if used for less than 1,000 hours there will be under-recovery,
i.e. in the first instance making an internal 'profit' and in the second a 'loss'.
Figure 4.4 Tractor costs

Unit rate

Cost

per

hours)

Fixed costs

Depreciation

Licence
insurance

($)

($)

2,000.00

2,000.00

and 200.00

200.00

annum

(1,000

BUDGETING AND ITS TYPES

Driver

100.00 per month 1,200.00

Repairs

600.00 per annum 600.00

Variable costs Fuel and oil

Maintenance

2.00 per hour

3.00

per

2,000.00

200 1,500.00

hours

7,500.00

No. of hours used

1,000.00

Cost per hour

7.50

Master budget
The master budget for the sugar cane farm may be as shown in figure 4.5. The budget
represents an overall objective for the farm for the whole year ahead, expressed in
financial terms.
Table 4.5 Operating budget for sugar cane farm 19X4

1st quarter 2nd quarter 3rd quarter 4th quarter Total $

Revenue from cane

130,000

250,000

120,000

500,000

48,268

42,368

55,416

183,313

Less: Costs

Cultivation

37,261

BUDGETING AND ITS TYPES

Irrigation

7,278

15,297

18,473

11,329

52,377

Field maintenance

4,826

12,923

15,991

7,262

41,002

Harvesting

15,825

27,775

17,875

61,475

Transportation

14,100

24,750

15,750

54,600

49,365

106,413

129,357

107,632

392,767

Add: Opening valuation 85,800

135,165

112,240

94,260

85,800

135,165

241,578

241,597

201,892

478,567

Less: Closing valuation 135,165

112,240

94,260

90,290

90,290

Net crop cost

129,338

147,337

111,602

388,277

Gross surplus

66,200

102,663

8,398

111,723

Less: Overheads

5,876

7,361

7,486

5,321

26,044

Net profitless)

(5,876)

(6,699)

95,177

3,077

85,679

Once the operating budget has been prepared, two further budgets can be done,
namely:
i. Balance sheet at the end of the year.
ii. Cash flow budget which shows the amount of cash necessary to support the
operating budget. It is of great importance that the business has sufficient funds to
support the planned operational budget.

BUDGETING AND ITS TYPES

Reporting back
During the year the management accountant will prepare statements, as quickly as
possible after each operating period, in our example, each quarter, setting out the
actual operating costs against the budgeted costs. This statement will calculate the
difference between the 'budgeted' and the 'actual' cost, which is called the 'variance'.
There are many ways in which management accounts can be prepared. To continue
with our example of harvesting on the sugar cane farm, management accounts at the
end of the third quarter can be presented as shown in figure 4.6.
Figure 4.6 Management accounts - actual costs against budget costs Management
accounts for sugar cane farm 3rd quarter 19X4

3rd quarter

Year to date

Actual Budget Variance

Actual Budget Variance

- Cutting

12,200

12,000

(200)

19,060

18,750

(310)

- Sundry

742

1,125

383

1,584

1,875

291

Tractors

9,375

8,250

(1,125)

13,500

12,975

(525)

Cane trailers

1,678

2,400

722

2,505

3,750

1,245

Imp & sundries

4,270

4,000

(270)

6,513

6,250

(263)

28,265

27,775

(490)

43,162

43,600

438

Item Harvesting

Labour

BUDGETING AND ITS TYPES

Here, actual harvesting costs for the 3rd quarter are $28,265 against a budget of
$27,775 indicating an increase of $490 whilst the cumulative figure for the year to
date shows an overall saving of $438. It appears that actual costs are less than
budgeted costs, so the harvesting operations are proceeding within the budget set and
satisfactory. However, a further look may reveal that this may not be the case. The
budget was based on a cane tonnage cut of 16,000 tonnes in the 3rd quarter and a
cumulative tonnage of 25,000. If these tonnages have been achieved then the
statement will be satisfactory. If the actual production was much higher than budgeted
then these costs represent a very considerable saving, even though only a marginal
saving is shown by the variance. Similarly, if the actual tonnage was significantly less
than budgeted, then what is indicated as a marginal saving in the variance may, in
fact, be a considerable overspending.
Price and quantity variances
Just to state that there is a variance on a particular item of expenditure does not really
mean a lot. Most costs are composed of two elements - the quantity used and the price
per unit. A variance between the actual cost of an item and its budgeted cost may be
due to one or both of these factors. Apparent similarity between budgeted and actual
costs may hide significant compensating variances between price and usage.
For example, say it is budgeted to take 300 man days at $3.00 per man day - giving a
total budgeted cost of $900.00. The actual cost on completion was $875.00, showing a
saving of $25.00. Further investigations may reveal that the job took 250 man days at
a daily rate of $3.50 - a favourable usage variance but a very unfavourable price
variance. Management may therefore need to investigate some significant variances
revealed by further analysis, which a comparison of the total costs would not have
revealed. Price and usage variances for major items of expense are discussed below.
Labour
The difference between actual labour costs and budgeted or standard labour costs is
known as direct wages variance. This variance may arise due to a difference in the
amount of labour used or the price per unit of labour, i.e. the wage rate. The direct
wages variance can be split into:

BUDGETING AND ITS TYPES

i) Wage rate variance: the wage rate was higher or lower than budgeted, e.g. using
more unskilled labour, or working overtime at a higher rate.
ii) Labour efficiency variance: arises when the actual time spent on a particular job is
higher or lower than the standard labour hours specified, e.g. breakdown of a
machine.
Materials
The variance for materials cost could also be split into price and usage elements:
i) Material price variance: arises when the actual unit price is greater or lower than
budgeted. Could be due to inflation, discounts, alternative suppliers etc.
ii) Material quantity variance: arises when the actual amount of material used is
greater or lower than the amount specified in the budget, e.g. a budgeted fertiliser at
350 kg per hectare may be increased or decreased when the actual fertiliser is applied,
giving rise to a usage variance.
Overheads
Again, overhead variance can be split into:
i) Overhead volume variance: where overheads are taken into the cost centres, a
production higher or lower than budgeted will cause an over-or under-absorption of
overheads.
ii) Overhead expenditure variance: where the actual overhead expenditure is higher or
lower than that budgeted for the level of output actually produced.
Calculation of price and usage variances
The price and usage variance are calculated as follows:
Price

variance

(budgeted

price

actual

price)

actual

Usage variance = (budgeted quantity - actual quantity) X budgeted price

Now attempt exercise 4.2.

quantity

BUDGETING AND ITS TYPES

Exercise 4.2 Computation of labour variances

It was budgeted that it would take 200 man days at $10.00 per day to complete the
task costing $2,000.00 when the actual cost was $1,875.00, being 150 man days at
$12.50 per day. Calculate:
i)

Price

variance

ii) Usage variance

Comment briefly on the results of your calculation.
Management action and cost control
Producing information in management accounting form is expensive in terms of the
time and effort involved. It will be very wasteful if the information once produced is
not put into effective use.
There are five parts to an effective cost control system. These are:
a) preparation of budgets
b) communicating and agreeing budgets with all concerned
c) having an accounting system that will record all actual costs
d) preparing statements that will compare actual costs with budgets, showing any
variances and disclosing the reasons for them, and
e) taking any appropriate action based on the analysis of the variances in d) above.
Action(s) that can be taken when a significant variance has been revealed will depend
on the nature of the variance itself. Some variances can be identified to a specific
department and it is within that department's control to take corrective action. Other
variances might prove to be much more difficult, and sometimes impossible, to
control.

BUDGETING AND ITS TYPES

Variances revealed are historic. They show what happened last month or last quarter
and no amount of analysis and discussion can alter that. However, they can be used to
influence managerial action in future periods.
Zero base budgeting (ZBB)
After a budgeting system has been in operation for some time, there is a tendency for
next year's budget to be justified by reference to the actual levels being achieved at
present. In fact this is part of the financial analysis discussed so far, but the proper
analysis process takes into account all the changes which should affect the future
activities of the company. Even using such an analytical base, some businesses find
that historical comparisons, and particularly the current level of constraints on
resources, can inhibit really innovative changes in budgets. This can cause a severe
handicap for the business because the budget should be the first year of the long range
plan. Thus, if changes are not started in the budget period, it will be difficult for the
business to make the progress necessary to achieve longer term objectives.
One way of breaking out of this cyclical budgeting problem is to go back to basics
and develop the budget from an assumption of no existing resources (that is, a zero
base). This means all resources will have to be justified and the chosen way of
achieving any specified objectives will have to be compared with the alternatives. For
example, in the sales area, the current existing field sales force will be ignored, and
the optimum way of achieving the sales objectives in that particular market for the
particular goods or services should be developed. This might not include any field
sales force, or a different-sized team, and the company then has to plan how to
implement this new strategy.
The obvious problem of this zero-base budgeting process is the massive amount of
managerial time needed to carry out the exercise. Hence, some companies carry out
the full process every five years, but in that year the business can almost grind to a
halt. Thus, an alternative way is to look in depth at one area of the business each year
on a rolling basis, so that each sector does a zero base budget every five years or so.

BUDGETING AND ITS TYPES

Budget types

Sales budget an estimate of future sales, often broken down into both units
and currency. It is used to create company sales goals.

Production budget - an estimate of the number of units that must be

manufactured to meet the sales goals. The production budget also estimates
the various costs involved with manufacturing those units, including labor and
material. Created by product oriented companies.

Capital budget - used to determine whether an organization's long-term

investments such as new machinery, replacement machinery, new plants, new
products, and research development projects are worth pursuing.

Cash flow/cash budget a prediction of future cash receipts and expenditures

for a particular time period. It usually covers a period in the short-term future.
The cash flow budget helps the business determine when income will be
sufficient to cover expenses and when the company will need to seek outside
financing.

Marketing budget an estimate of the funds needed for promotion,

advertising, and public relations in order to market the product or service.

Project budget a prediction of the costs associated with a particular

company project. These costs include labour, materials, and other related
expenses. The project budget is often broken down into specific tasks, with
task budgets assigned to each. A cost estimate is used to establish a project
budget.

Revenue budget consists of revenue receipts of government and the

expenditure met from these revenues. Tax revenues are made up of taxes and
other duties that the government levies.

Expenditure budget includes spending data items.

Types of Budgets in Managerial Accounting

Managerial accounting approaches a company's financial situation in an operational
way, giving information in a manner that supports managers in planning and control
procedures. Various budget formats in managerial accounting influence how a

BUDGETING AND ITS TYPES

manager forecasts department activity and how he addresses progress or shortfall to

meet goals. Companies may use several types of managerial budgets concurrently.
Master Budget
A master budget is a comprehensive projection of how management expects to
conduct all aspects of business over the budget period, usually a fiscal year. The
master budget summarizes projected activity by way of a cash budget, budgeted
income statement and budgeted balance sheet. Most master budgets include
interrelated budgets from the various departments. Managers typically use these
subset budgets to plan and set performance objectives. Master budgets are generally
used in larger businesses to keep many managers on the same page.
Operational Budgets
The operational budget covers revenues and expenses surrounding the day-to-day core
business of a company. Revenues represent sales of products and services; expenses
define the costs of goods sold as well as overhead and administrative costs directly
related to producing goods and services. While budgeted annually, operating budgets
are usually broken down into smaller reporting periods, such as weekly or monthly.
Managers compare ongoing results to budget throughout the year, planning and
adjusting for variations in revenue.
Related Reading: Overview of Managerial Accounting Practices
Cash Flow Budget
A cash flow budget examines the inflows and outflows of cash in a business on a dayto-day basis. It predicts a company's ability to take in more money than it pays out.
Managers monitor cash flow budgets to pinpoint shortfalls between expenses and
sales -- times when financing may be needed to cover overheads. Cash flow budgets
also suggest production cycles and inventory levels so that a company's resources are
available for activity, not sitting idle on warehouse shelves.
Financial Budget

BUDGETING AND ITS TYPES

A financial budget outlines how a business receives and spends money on a corporate
scale, including revenues from core business plus income and costs from capital
expenditures. Managing assets such as property, buildings, investments and major
equipment may have a significant effect on the financial health of a company,
particularly through the peaks and troughs of daily business. Executive managers use
financial budgets to leverage financing and value the company for mergers and public
offerings of stock.
Static Budget
A static budget contains elements where expenditures remain unchanged with
variations to sales levels. Overhead costs represent one type of static budget, but these
budgets aren't confined to traditional overhead expenses. Some departments may have
a fixed amount of money set in budget to spend, and it is up to managers to make sure
such amounts are spent without going over-budget. This condition occurs routinely in
public and nonprofit sectors, where organizations or departments are funded largely
by grants.