Week 5 Budget Classifications

Budget Classifications

Budgets are classified into a number of categories. Here are some examples:

• Static Budgets
  A static budget is a budget prepared for one level of activity, for example a particular volume of production or level of sales.
• Flexible Budgets
  A flexible budget is simply several static budgets covering a range of activity within which the organization may operate. For example, a company may prepare a number of sets of future financial statements (i.e., pro forma financial statements) for a number of expected sales levels. Important Note: Tthis process is sometimes referred to as what if analysis. See an example in Table 7.4 on page 133 in your Harvard Business Press Finance for Managers text.
• Zero-Based Budgeting
  The normal approach to budgeting is to use historical figures and adjust these for anticipated future events. Zero-based budgeting sets the initial figures for each activity to zero. To receive funding from the budgeting process, each activity must be justified in terms of its continued usefulness and the resources needed for that activity. This forces management to think carefully about the operations of the organization before allocating resources.
• Period Budgets
  Budgets are usually developed for a specified period of time. Short-range budgets cover a month, a quarter or a year.
• Rolling Budgets
  Rolling budgets are continually updated by periodically adding a new incremental time period and dropping the period just completed. For example, a company might prepare a cash budget that estimates receipts and payments week by week for thirteen weeks and then month by month for a further twelve months. After the first three months the old weekly budget is dropped off, the first three of the monthly budgets are revised to thirteen weekly budgets, and three new months are added to the total period, so that fifteen months of cash receipts and payments are still projected for the future.
• Master Budgets
  A master budget is a combination of all the budgets of an organization, dealing with all phases of the operations of the business for a particular period of time. Important Note: See Figure 1.3 on page 176 in your McGraw-Hill Create text for an example of a master budget for a merchandising firm. An example of flow chart used to create a master budget is shown in Figure 7-1 on page 120 in your Harvard Business Press Finance for Managers text.
• Capital Expenditure Budgets
  The capital expenditure budget quantifies the capital investment decisions determined in the organization’s long term plans.
• Revenue Budgets
  Revenue budgets are estimates of the income of an organization for a specific period. The preparation of revenue budgets forms the beginning of the budgeting process.
• Operating Budgets
  Operating budgets are those budgets which estimate activities that will affect profit. Examples for a manufacturing organization are production budget, direct materials budget, factory overhead budget and cost of goods sold budget. Also, cash budgets are an important category of operating budgets.
• Budgeted Financial Statements
  The budgeted income statement, budgeted balance sheet and budgeted cash flow statement show the estimated results and projected financial position of an organization. They are sometimes referred to as pro forma financial statements or pro forma forecasts.