Classification of budget according to Time, Function and Flexibility. Long term budget, Short term budget, Long term budget, Short term budget, Sales budget, Production budget

1. Budget
Classifications
SUBMITTED BY:-
KUNDAN GANVIR

2. What is a Budget?
ICMA defines budget as:
“A budget is a quantitative statement, for a defined period
of time, which may include planned revenues, expenses,
assets, liabilities and cash flows. A budget provides a focus
for the organizations, aids in the co-ordination of activities
and facilitates control.”

3. Classification of Budgets
According to time
Long term
budget
Short term
budget
According to function
Sales Budget
Production
Budget
Cost of Production
Budget
R&D Budget
Cash Budget
Master
Budget
According to flexibility
Fixed Budget
Flexible Budget

4. Classification of Budget according to Time
Short Term Budget
• May cover periods of three to twelve
months depending upon nature of
business
• Should be long enough to allow
completion of a season or all aspects
of a business
• The period should coincide with
financial accounting period to
facilitate evaluation of performance
e.g. A budget allocated to
manufacturing of lots for spring-
summer season, Fashion Retailing, etc.
Long Term Budget
• A systematic and formalized process
for directing & controlling operations
for period extending beyond one year
• It evaluates future implications
associated with present decisions
• Market trends, change in
demographics, national income, etc.
play important role in preparing long
term budget
• It proves useful in forecasting and
evaluation of an organization over
period of time
e.g. A father planning money
requirement for his child’s future

5. Examples on short term and long term
budget
• Short Term budget:
A student allocating his/her pocket money to his monthly expenses
like food, clothing, rent, leisure activities, stationaries, etc.
• Long Term budget:
A father planning future of his children:
College expenses –
Child 1 (current age 8); $20,000/year beginning in 10 years
Child 2 (current age 3); $24,000/year beginning in 15 years
New car purchase - $30,000 in two years ($4,000 upfront +
$400/month for seven years)

6. Classification of Budget according to Function
Sales Budget
• The most important budget, all other budgets are contingent upon
• Production budget, selling and distribution, etc. are affected by sales
budget
E.g.
Quarter 1 Quarter 2 Quarter 3 Quarter 4 Yearly
Sales units 120 130 150 165 565
Price per unit 20 22 25 27
Total Sales 2400 2860 3750 4455 13465
Sales forecasting:
Developing a sales budget requires forecasting future sales, which depends upon three
main factors:
1. Information concerning past performance
2. Information about present conditions within industry and sales territory and
3. Data concerning the industry and general business conditions

7. Classification of Budget according to Function
Production Budget
• It is stated in physical units
• It specifies the number of units of each product that must be
produced to satisfy the sales forecast
• The number of units to be produced can be formulated using:
Units to Produce = Budgeted sales + Desired closing inventory
of finished goods – Beginning inventory of finished goods
E.g.
Budgeted sales = 70,000,
Desired closing finished goods inventory = 20,000
Beginning finished goods inventory = 40,000
Units to be produced = (70,000 + 20,000 – 40,000) = 50,000

8. Classification of Budget according to Function
Production Cost Budget
• It summarizes the materials budget, labor budget and the factory
overhead budget
• It is made up of three budgets:
• Materials
• Labor
• Factory overhead
Direct Materials budget:
• It specifies the cost of direct materials used and cost of the direct materials
purchased.
• It helps in developing purchasing and delivery schedule
• Helps to meet production targets
Direct Labor Budget:
• It estimates the labor, in number and grades, to enable production budget
to be achieved
• It must disclose: grade of labor along with cost (wages) and period of
training
Factory Overhead Budget:
• Prepared on basis of chart of accounts which reflects different expense
accounts and details of cost center or departments

9. Example on Production Cost budget
Material Usage
budget
Product A Product B Total
Budgeted
production
50,000 80,000
Direct materials
requirements
Product A X 5
Product B X 8
Direct materials
usage (kg)
2,50,000 4,80,000
Cost per kg Rs. 1 Rs. 1.50
Cost of Direct
materials used
Rs. 2,50,000 Rs. 7,20,000 Rs. 9,70,000

10. Classification of Budget according to Function
Research and Development Budget
• A tool for planning and controlling research and development costs
• Helps in coordination with company’s other plans and projects
• Helps allocation of funds for R&D by coordinating company’s
immediate and long-term plans
• Helps in planning staff and equipment requirements for R&D

11. It contains details of cash inflows and cash outflows for the budget period of
some other specific period.
• It indicates effect on cash positions of seasonal requirements, unusual
receipts and slowness in collecting receivables
• Indicates availability of cash
• Shows availability of excess funds for short term investments
• Helps in planning bond redemptions, income tax installments and
payments to employees
Classification of Budget according to Function
Cash Budget
Period of Cash budget
1. Operational: May be prepared monthly, weekly even daily to meet requirements
2. Short range: Prepared annually and is in correspondence with annual profit plan.
Indicates cash inflows and outflows as generated by annual profit plan
3. Long range: Does not disclose detailed estimates of revenue and expenses.
It is prepared according to:
• The timing of the capital expenditure projects
• The timing of long range profit plan

12. Classification of Budget according to Function
Master Budget
• It is summary or total budget package for a business firm
• It can be called end product of budget making process
• IT reveals the top management’s goals of revenues, expenses, net
income, cash inflows and financial positions
• Takes the macro view of business and coordinates with
production, raw materials, manpower and other resources with
production targets
• It cuts across divisional boundaries to coordinate firms’ diverse
activities
• The operating budgets constitute the building block used to
complete the master budget

13. Classification of Budget according to Function
Fixed Budget
• Fixed budget is designed to remain unchanged irrespective of the
level of the activity actually attained
• It is based on single level of activity
• It compares data from actual operations with single level of
activity reflected in budget
• Fixed budget is good for performance measurement, if output can
be estimated within close limits

14. Classification of Budget according to Function
Flexible Budget
• It is prepared for a range, for more than one level of activity
• It is a set of alternative budgets to different levels of activity
• Flexible budget is prepared considering that a business is dynamic, ever
changing and never static
• Important features of flexible budget:
• It covers a range of activity
• It is easy to change with variation in production levels
• It facilitates performance measurement and evaluation
Advantages of Flexible budgeting:
1. Accurate budgeting: Output factor is considered while preparation, since cost of goods may
fluctuate time to time
2. Coordination: Production is planned in relation to expected sales, materials and labor are
acquired to meet expected production requirements
3. Control tool: Comparison between the budgeted costs and actual costs form basis for
analyzing cost variances and fixing responsibility for same. This motivates managers to feel
themselves motivated in controlling costs for which they are responsible.

15. Zero Base Budgeting (ZBB)
• Zero base budgeting is method of budgeting where by all the activities are
re-valuated each time budget is formulated.
• It involves starting from zero
• In ZBB, each department’s functions are reviewed completely
• ZBB rejects incremental nature of traditional budgeting, instead states
that expenditure of each program must start from base zero with each new
budget being compiled as if the programs were being launched for first
time
Advantages of ZBB:
• It identifies and eliminates wastage and obsolete operations
• Develops questioning attitude
• Leads to staff involvement which may lead to improved motivation
• Increases communication and coordination within organization
Disadvantages of ZBB:
• Cost involved in preparing a vast number of decision packages in large firm are very high
• Time consuming and large amount of paperwork is involved
• Managers may oppose new ideas and changes

16. Zero Base Budgeting (ZBB)
Steps followed in application of ZBB:
1. Decision packages are prepared so that management can:
• Evaluate and rank it against other activities and
• Decide to approve of disapprove it
2. Each decision package is justified that it promotes the goals of
enterprise
3. If justifies, then the cost of minimum efforts needed to sustain is
determined
4. Alternatives for each package are considered
5. Incremental decision package are also justified and costed to
describe benefits of additional work that would be done
6. Managers rank their decision packages in order of priority for
resource allocation
7. Resources are allocated to the decision package.

17. Thank You