Types of Budgets: What you Need to Know about Budgeting Types

There are different types of budgets that vary depending on the nature and purpose of preparation.

On the basis of time, there are fixed and rolling budgets. A fixed budget is prepared for a fixed time frame while a rolling budget is prepared as time goes, that is, the time frame is added at the end and the same is removed at the beginning. This may be in terms of months or quarterly basis.

There are also functional budgets prepared for the different departments and subsidiary budgets that are subdivisions of the functional budgets. These are mostly prepared by line managers in regard to their line of supervision.

A comprehensive budget that includes all the other budgets from the departments is called a master budget and it mainly for the whole organization so as to provide an insight on other financial statements like the profit and loss account and the balance sheet.

In order to prepare budgets, several methods may be applied depending on the nature of the budget. These include;

1) Fixed Budgeting

This approach sets a budget that is assumed to remain the same regardless of the level of output (Rubin, 1990). This type of approach in budgeting is most appropriate for stable firms which operate in stable markets.

2) Flexible Budgeting

This approach recognizes the possibility of changes with the level of activity particularly in costs, activity level and behavioral patterns (Rubin, 1990). The budget prepared may be adjusted to accommodate these variances if they occur.

3) Incremental Budgets

This type of budgetary approach is based on the previous year’s figures which are adjusted depending on activity level or inflationary fluctuations (Rubin, 1990). However, these budgets do not justify past performance and may result to over/under stating of the estimates. It is best suited for organizations that operate in stable environments.

4) Zero Based Budgeting

This approach has no assumptions and it requires a justification of all the costs that are to be included in budget preparation (Rubin, 1990). All activities and their associated costs are consolidated from a zero point until a fully justified budget is prepared. This is time consuming and its regular preparation not appropriate

5) Priority Based Budgeting

This is an approach that requires costs to be included in the budget on priority basis. This is mostly applicable in organizations with extreme budget constraints in terms of funds.

6) Activity Based Budgeting

This approach tries to identify the main activities and cost drivers in the organization and the budget is prepared after allocating costs to these activities.

Leave a Reply

Your email address will not be published. Required fields are marked *