types of budgets

The following points highlight the three types of budgets Prepared in budgetary control, i.e, (A)  Classification According to Time, (B) Classification on the Basis of Functions, and (C) Classification on the Basis of Flexibility.

(A) Classification According to Time:

1. Long Term Budget:

The budgets are prepared to depict long term planning of the business. The period of long term budgets varies between five to ten years. The long term planning is done by the top level management; it is not generally known to lower levels of management. Long time budgets are prepared for some sectors of the concern such as capital expenditure, research and development, long term finances, etc. These budgets are useful for those industries where gestation period is long i.e., machinery, electricity, engineering, etc.

2. Short-Term Budget:

These budgets are generally for one or two years and are in the form of monetary terms. The consumers goods industries like sugar, cotton, textile, etc. use short-term budgets.

3. Current Budget:

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The period of current budgets is generally of months and weeks. These budgets relate to the current activities of the business. According to I.C.W.A. London, “Current budget is a budget which is established for use over a short period of time and is related to current conditions.”

(B) Classification on the Basis of Functions:

1. Operating Budget:

These budgets relate to the different activities or operations of a firm. The number of such budgets depends upon the size and nature of business.
The commonly used operating budgets are:
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(a) Sales Budget
(b) Production Budget
(c) Production Cost Budget
(d) Purchase Budget
(e) Raw Material Budget
(f) Labour Budget
(g) Plant Utilization Budget
(h) Manufacturing Expenses or Works Overhead Budget


(i) Administrative and Selling Expenses, Budget, etc.

Classification on the Basis of Flexibility:

1. Fixed Budget:

The fixed budgets are prepared for a given level of activity, the budget is prepared before the beginning of the financial year. If the financial year starts in January then the budget will be prepared a month or two earlier, i.e., November or December. The changes in expenditure arising out of the anticipated changes will not be adjusted in the budget.
There is a difference of about twelve months in the budgeted and actual figures. According to I.C.W.A. London, “Fixed budget is a budget which is designed to remain unchanged irrespective of the level of activity actually attained.” Fixed budgets are suitable under static conditions. If sales, expenses and costs can be forecasted with greater accuracy then this budget can be advantageously used.

2. Flexible Budget:

A flexible budget consists of a series of budgets for different level of activity. It, therefore, varies with the level of activity attained. A flexible budget is prepared after taking into consideration unforeseen changes in the conditions of the business. A flexible budget is defined as a budget which by recognizing the difference between fixed, semi-fixed and variable cost is designed to change in relation to the level of activity.
The flexible budgets will be useful where level of activity changes from time to time. When the forecasting of demand is uncertain and the undertaking operates under conditions of shortage of materials, labour etc., then this budget will be more suited.
Difference between a Fixed and Flexible Budget

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