Types of Budgets

Budgeting

The budget is basically future estimates of revenue or cost. Budget is play very important rule in directing organization activity to achieve long term goals. Budget also serves the purpose of controlling the organization resources. Budgets can also be used for the purpose of performance measure of different manager and center.

Types of budgets

There are mainly the following types of budgets commonly prepared in the organization.

1. Periodic budget
2. Rolling budget
3. Fixed budget
4. Flexible budget
5. Incremental Budgets
6. Zero based budget 

Periodic budget

The periodic budget is prepared for a period for example for one year and does not change during the period.

Rolling budget

The rolling budget is also known as continuous budget and budget is updated after a specific period of time. The concept is that budget is updating after some period of time. The advantage of this method is that budget is regularly updated and new situation incorporated in the budget, however this type of budget has little budgetary controls.

 Fixed Budget

A fixed budget does not change with level of activity. For example a construction manager has prepared a fixed budget for the construction of a bridge and site manager require completing the construction work within this budget. The fixed budget has no answer in certain situation where the budget depends on the level of activity.

Flexible budget

A flexible budget changes with level of activity.  i.e (number of unit produced). For example for 10,000 units the production cost was 18,000 and for 12,000 unit production cost was 20,000. This budget is more practical approach of budgeting because budget are prepared for operation and activities and this method give due consideration to level of activity.

Incremental Budget

The incremental budget use the last year budget as base and the incorporate inflation and other factor in that budget in that and thus a new budget is prepared.

Advantages of incremental budget

1.      This is very simple

2.      The Time is saved

Disadvantages of incremental budget

The main disadvantage of incremental budgeting is that the manager will manipulate the figure to get the desired level of performance in the next period. For example sales manager would keep the sales figure low so there would be not pressure to achive that level. Similarly the production manager would keep the wastage level high so that no one will ask him about the high level of wastage in future.

Zero Based Budgets

Zero based budgets are prepared from the scratch. This concept try to eliminate the wrong projection and encourages to prepare the budget on facts and not merely the changing the number in excel sheet. The biggest limitation of Zero based budget is time consuming.

 Advantages of Zero based budget

Justified Figures

The budget includes only the justified figures and each manager has to justify the figures before it is included in the budget. The manager has to prepare a proper case for approval.

Put Manager Responsibility

This system of responsibility is evoked by the Zero budget system. The manager take the responsibly of preparing the budget and then they are responsible to produce results in accordance with budgets.

Accuracy and Realistic

This system ensures the preparation of more realistic and accurate budget.

Disadvantages of Zero Based Budgets

Time consuming

The zero based require a detail research by the relevant manager therefore it require much time of manager to prepare the budget.

Formal

This process is very formal and it requires a lot of time and energies of manager and the manager cannot focus on their main tasks.

Pressure

This budget put extra pressure on manager for accuracy of estimates and then achievement of target set by themselves.

Attempt of actual figures

This budget tries to prepare the budget with accuracy. The basic definition that budget is a estimate is ignored.