Ans. CLASSIFICATION OF BUDGETS
Budgets
can be classified into different categories on the basis of time, functions or
flexibility
1)
Classification According to Time
The
budget, on the basis of time, may be classified as :
a)
Long-term budget,
b)
Short-term budget, and
c)
Current budget.
Long-Term Budget
:
A budget designed for a long period is termed as a Long-term budget. The period
generally is of 5 to 10 years. These budgets are concerned with planning of the
operations of a firm over a considerably long period of time. They are
generally prepared in terms of physical quantities.
Short-Term
Budget :
The budget prepared for a period of less than 5 years is a short-term budget.
Generally short-term budgets are prepared for a period of one to two years.
They are generally prepared in terms of physical as well as in monetary units.
Current Budget : The budget
prepared for a period of a week, a month, or a quarter is termed as a current
budget. They are essentially short-term budgets adjusted to current conditions
or prevailing circumstances.
2)
Classification According to Function
Budgets
can be classified on the basis of functions, they are meant to perform.
Different types of budgets under this head are as follows:
Sales Budget : This is the
most important budget on which all other budgets are based. The sales manager
is responsible for preparation and execution of the budget. The budget forecasts
total sales in terms of quantity, value, items, periods, areas etc.
Production
Budget :
The budget is basically based on sales budget. It forecasts quantity of
production in terms of items, periods, areas, etc. The works manger is
responsible for the preparation of overall production budget and departmental
works manager is responsible for departmental production budgets.
Cost of
Production Budget :
It forecasts the cost of production. Separate budgets are prepared for
different elements of costs such as direct materials budget, direct labour
budget, factory overheads budget, office overheads budget, selling and
distribution overhead budget, etc.
Purchase Budget
:
The budget forecasts the quantity and value of purchases required for
production. It gives quantity-wise and period-wise information about the
materials to be purchased. It correlates with sales forecast and production
planning.
Personnel Budget
:
The budget anticipates the quantity of personnel required during a period for
production activity. This may be further split up between direct and indirect
personnel budgets.
Research Budget
:
The budget relates to the research work to be done for improvement in quality
of the products or research for new products.
Capital
Expenditure Budget :
The budget provides a guidance regarding the amount of capital that may be
required for procurement of capital assets during the budget period.
Cash Budgets : The budget is a
forecast of the cash position, for a specific duration of time for different time
periods. It states the estimated amount of cash receipts and cash payments and
the likely balance of cash in hand at the end of different periods.
Master Budget : It is a summary
budget incorporating all functional budgets in a capsule form. It interprets
different functional budgets and covers within its range the preparation of
projected income statement and projected balance sheet.
3)
Classification According to Flexibility Budget
can
also be classified in the following categories:
Fixed Budget : A budget
prepared on the basis of a standard or a fixed level of activity is called a
fixed budget. It does not change with the change in the level of activity. If
the output and sales do not fluctuate from year to year or if an accurate
prediction of the same can be made, a fixed budget can be prepared.
Flexible Budget
: A
budget designed in a manner so as to give the budgeted cost of any level of
activity is termed as a flexible budget. Such a budget is prepared after
considering the fixed and variable elements of cost and the changes that may be
expected for each item at various levels of operation
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