Types of Budgets

Learning Outcomes

  • Identify types of budgets

Companies, nonprofit organizations, and governmental units use many different types of budgets, and there are many ways to classify the different budgets by purpose, by use, and by function.

For instance, budgets may be static, flexible, or continuous. A static budget is based on one projected level of production. Most family budgets are static in that the family decides on acceptable levels of spending, projects the earnings for the year and other sources of funds, and then runs with that unless something changes dramatically. On the other hand, some small businesses and families use a continuous budget that is updated monthly. For instance, auto insurance that is paid semi-annually in June and December would make the budget for those months different than the budgets for other months, and self-employed individuals may have to constantly update the projections and budgets based on jobs. A flexible budget is designed around several different assumptions, such as alternative sales volumes.

Budgets may be strategic, such as a five-year budget, or operational, such as monthly or annual budgets. Most companies use computerized accounting software and tend to budget monthly if possible for operations.

In addition, many organizations create responsibility budgets that are designed to be managed by unit managers and that roll up into a master budget. For instance, the sales manager will have a budget specifically for the sales department with sales quotas and expense expectations. Note though that in creating a master budget, the accounting staff will look at both the budgets proposed by the departments (responsibility budgets) and the overall, top-down budgets proposed by upper management in order to create a master budget.

The master budget consists of an operating budget, a capital budget, and a financial budget.

The operating budget consists of, in general:

  • Sales Budget
  • Production Budget
  • Direct Materials Budget
  • Direct Labor Budget
  • Manufacturing Overhead Budget
  • Cost of Goods Sold Budget
  • Selling, General, and Administrative Expense Budget

Operating Budget Components flowchart. At the top is the sales budget, which has two arrows pointing to the production budget and the SG&A budget. The production budget has three arrows pointing to the materials budget, labor budget, and manufacturing overhead budget. Those three budgets each have an arrow pointing to the cost of goods sold budget.

The financial budget consists of:

  • Cash Budget
  • Budgeted Income Statement
  • Budgeted Balance Sheet

Capital budgets evaluate long-term capital projects such as the addition of equipment or the relocation of a plant.

This module covers operating and financial budgets. Capital budgeting and long-term decision-making are covered in a separate module.

A flowchart titled “Types of Budgets”. At the top is the sales budget. The sales budget has two arrows pointing to the production budget and the SG&A budget. The production budget has three arrows pointing to the materials budget, labor budget, and manufacturing overhead budget. Those three budgets are all pointing to the cost of goods sold budget. The sales, production, materials, labor, manufacturing overhead, cost of goods sold, and SG&A budget boxes are all blue and there is a bracket labeling those as the operating budget. Below the operating budget is a horizontal line showing the capital expenditures budget in red on the left, and going to the right from there, an arrow pointing to the cash budget, with another arrow pointing to the budgeted income statement, and a final arrow pointing to the budgeted balance sheet. The cash budget, budgeted income statement, and budgeted balance sheet are all green and there is a bracket labeling those as the operating budget. There are also arrows pointing from the cost of goods sold budget and the SG&A budget to the cash budget.

 

Practice Question