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
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.