Budgets can be categorized in various ways. Let us go through the types of budgets in detail.
It relates to any function of the firm such as sales, production, cash, etc. Following budgets are prepared in functional budgets:
● Sales Budget
● Production Budget
● Material Budget
● Manufacturing Budget
● Administrative Cost Budget
● Plant Utilization Budget
● Capital Expenditure Budget
● Research and Development Cost Budget
● Cash Budget
Master Budget or Summarized Budget or Finalized Profit plan
This budget is very useful for the top management of the company because it covers all the information in a summarized manner.
It is a rigid budget and is drawn on the assumption that there will be no change in the budget level.
It is also called a sliding scale budget. It is useful in:
● the new organizations where it is difficult to foresee,
● the firms where activity level changes due to seasonal nature or change in demand,
● the industries based on change of fashion,
● the units which keep on introducing new products, and
● the firms which are engaged in ship-building business.
Zero Base Budgeting
Zero base budgeting is not based on the incremental approach; previous year figures are not adopted as base.
CIMA has defined it as:
As a method of budgeting, where all activities are revaluated each time a budget is set, discrete levels of each activity are valued and combination is chosen to match the funds available.
Following ratios are used to evaluate the deviations of the actual performance from the budgeted performance. If the ratio is 100% or more, it represents favorable results and vice-a-versa.
|Capacity Ratio||=Actual hours workedBudgeted hours|
|Activity Ratio||=Standard hours for actual production Budgeted hours × 100|
|Efficiency Ratio||=Standard hours for actual production Actual hours worked × 100|
|Calendar Ratio||= Number of actual working days in a period Number of working days in the budgeted period × 100|