What are the budget types in accounting?

January 14, 2012

Learn about different budget types and classification in accounting.

1. Main budget types

Budgeting is performed for planning and control purposes. Budgeting allows identifying and setting business objectives and goals. There is a variety of budgets. The most common budget types include the following:

  • master budget
  • operating budget
  • financial budget
  • cash budget
  • static budget
  • flexible budget
  • capital expenditure budget, and
  • program budget

Budgets can be classified as following:

  • activity-based budget
  • add-on budget
  • bracket budget
  • continuous (rolling) budget
  • incremental budget
  • strategic budget
  • stretch budget
  • supplemental budget, and
  • target budget

These budget types are briefly explained below.

Master budget is the set of financial and operating budgets for a specific accounting period, usually the next fiscal or calendar year. Master budget is prepared quarterly or annually. The format of the master budget varies with business nature and size. Operating budgets are used in daily operations and are the basis for financial budgets. Operating budgets include the following: sales, production, direct materials, direct labor, overhead, selling and administrative expenses, cost of goods manufactured, and cost of goods sold. Financial budgets include a budgeted income statement and balance sheet, cash budget, and capital expenditures budget. Budgeted income statement and budgeted balance sheet are also called pro forma financial statements.

Operating budget is the budget for income statement elements such as revenues and expenses.

Financial budget is the budget for balance sheet elements. In other words, financial budget deals with the expected assets, liabilities, and stockholders’ equity.

Cash budget is the budget for expected cash inflows and outflows during the specific period of time. Cash budget consists of four sections: receipts, disbursements, cash surplus or deficit, and financing section. The receipts section lists the beginning cash balance, cash collections from customers, and other receipts. The disbursements section shows all cash payments (characterized by purpose). The cash surplus (deficit) section provides the difference between cash receipts and cash disbursements. Finally, the financing section examines in detail expected borrowings and repayments during the period.

Static (fixed) budget is the budget at the expected capacity level. Because static budget is fixed, it is usually used by stable companies. Also, this type of budget can be used by departments with operations independent from capacity levels. For example, operations of administrative and general marketing departments usually does not depend on the level of production and sales and is rather determined by the department’s management; as the result, static budget can be used by such departments.

Flexible (expense) budget is the budget at the actual capacity level. Because flexible budget is dynamic, it is commonly used by companies. Flexible budget is adjusted to the actual activity of the company. It can be easily prepared using a computerized spreadsheet (e.g., Excel). At first, the relevant activity range is determined for the coming period. Next, costs that are expected be incurred over the relevant range are analyzed. These costs are then separated based on their cost behavior: fixed, variable, or mixed. Finally, the flexible budget for variable costs at different points throughout the relevant range is prepared. In other words, flexible budget matches expenses to specific revenue levels or activity levels. For example, utility costs can be tied to the number of machines in operation.

Capital expenditure budget is the budget for expected investments in capital assets and long-term projects. It is usually prepared for 3 to 10 years. Investments in capital assets include purchasing fixed assets such as plant, land, buildings, machinery, equipment, and mineral resources. Long-term projects might be undertaken to develop new products, expand existing product lines, or reduce costs. Sometimes a capital project committee is created to overlook capital budgeting processes. Such a committee is typically separate from the budgeting committee.

Program budget is the budget for a specific program or activity such as marketing, research and development, public relations, training, engineering, etc. Usually program budgets are created for product lines. As program budgets are typically created for activities of multiple departments, such budgets cannot be used for control purposes.

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