2. Budget classification

Activity-based budget is the budget for the costs of individual activities. In activity-based budgeting, all costs are allocated to cost centers and then are assigned to activities. Products or customers are allocated the costs based on the amount of activity they consume. Activity-based budgets ensure cost reduction and performance improvement. As activity-based budgeting requires a new budgeting model, it requires careful planning and implementation.

Add-on budget is the budget based on the previous years’ budgets adjusted for current information. For example, add-on budgets can be adjusted for new levels of inflation, employee wage rates, or new requirements.

Bracket budget is the budget at higher and lower levels than the base estimate. Essentially bracket budgets are contingency expense plans for downside risks. For example, such budgets allow management to estimate an impact of decreased sales on earnings. In bracket budgeting, management identifies potential problems and acceptable profit. In this way, management can test different alternatives and improve planning process.

Continuous (rolling) budget is the budget revised on a regular basis. As the period ends, a new budget period is added. For example, the budget can be regularly extended for another month (or quarter) at the end of each month (or quarter). As the result, continuous budgets are based on the most recent information and ensure proper planning and performance. The drawback of continuous budgets is that they require continuous planning.

Incremental budget is the budget adjusted for incremental increases in terms of dollars or percentages. Historically incremental budgeting has been the most common budgeting method. It is based on the prior’s year expenditures. In incremental budgeting, each budget line receives the same increment (e.g., 10% percent) increase or decrease for the next budget cycle.  Projects can also be segregated in multiple increments, and each increment is then allocated labor and other resources to complete the project. Incremental budget are easy to prepare. However, they have multiple drawbacks. Incremental budgets are based on aggregate data. They might not match company’s targets. Incremental budgets can potentially cause over- or underfunding of certain areas.

Strategic budget is the budget adjusted for strategic planning. Strategic budgets are used under conditions of uncertainty or instability. Strategic budgeting is the mixture between the top-down approach – when top management allocates resources – and the bottom-up approach – when lower management participates in resource allocation.

Stretch budget is the budget based on sales and marketing forecasts that are higher than estimates. Stretch budgets are not used for estimating expenditures; expenses are estimated at the budget target. Stretch budgets can be too subjective or complex.

Supplemental budget is the budget for an area that is not included in the main (base) budget.

Target budget is the budget that matches major expenditures to company’s goals.

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