TYPES OF BUDGETS
Budgets can be classified in various ways.
Sometimes they classified according to the items they contain or the length of time they cover, how they are made or even their degree of variability.
Considered below are some of the budgets frequently encountered in practice:
1. Zero based Budgeting
This can be defined as a method of budgeting whereby all activities are re-evaluated each time a budget is formulated. Each functional budget starts with the assumption that the function does not exist and is at Zero cost. Increments of cost are compared with increments of benefit, culminating in planning maximum benefit for a given budgeted cost.
It is a cost benefit approach to budgeting whereby it is assumed that the cost allowance for an item is zero, and will remain so until the manager responsible justifies the existence of the cost item and the benefits the expenditure brings to the organization.
2. Incremental budget
This is an approach to budgeting which involves extrapolating past activities and costs to determine items and amounts to be included in the budget.
3. Strategic Budgets
Firms make strategic plans. When these are put in quantitative terms they become strategic budgets.
4. Fixed budget
This is a budget which is designed to remain unchanged irrespective of the volume of output or turnover attained. In other words it is a single budget with no analysis of costs into fixed and variable elements.
5. Variable Budgets
This is also called Flexible budget. It can be defined as a budget which, by recognizing different cost behavior patterns, is designed to change as the volume of output changes.
It is designed to adjust the permitted cost levels to suit the level of activity. This is made possible by the analysis of costs into their fixed and variable elements.
6. Cash budgets
A cash budget is one of the most important budgets prepared in an organization. It shows in a summary form, the expected cash receipts and expected cash payments during the budget period.
Cash budgets are prepared in order to ensure that there will be just sufficient cash in hand to cope adequately with budgeted activities.
The cash budget may show that there is likely to be a deficiency of cash in some future period, in which case overdraft or loans will have to be arranged or activities curtailed. Alternatively, the budget may show that there is likely to be a cash surplus, in which case appropriate investment or use for the surplus can be planned rather than merely leaving the cash idle in a current account.
7. Profit/Loss budget
When the various budgets of different functions (ie purchasing, production, sales etc) in an organization are put together, one can now prepare profit/loss budget for the organization for the future period being considered.
8. Balance Sheet Budget
With the profit/loss budget for the organization and the other functional budgets, a balance sheet budget can as well be prepared for the future period being considered.