BUDGET

A budget is a presentation of a projected operating plan expressed in financial terms. Budgets can be developed for any period of time; however, most budgets cover a twelve-month period. There are three essential things needed for developing a budget: The first is a clear understanding of the goals of an operation and the requirements for achieving those goals. The second is a working knowledge of the accounting system with which the budget must conform. And the third is a carefully developed set of assumptions upon which the budget is constructed.

Types of budget
Sales budget An estimate of future sales, often broken down into both units and price. It is used to create company sales goals.

Production budget An estimate of the number of units that must be manufactured to meet the sales goals. The production budget also estimates the various costs involved with manufacturing those units, including labour and material. It is created by product oriented companies.
Cash flow/cash budget A prediction of future cash receipts and expenditures for a particular time period. It usually covers a period in the short term future.

Types of budget
Marketing budget an estimate of the funds needed for promotion, advertising, and public relations in order to market the product or service. Project budget a prediction of the costs associated with a particular company project. These costs include labour, materials, and other related expenses. The project budget is often broken down into specific tasks, with task budgets assigned to each. Revenue budget consists of revenue receipts of government and the expenditure met from these revenues. Tax revenues are made up of taxes and other duties that the government levies.

Types of budget
Expenditure Budgets-Expenditure budgets may be drafted as fixed / flexible budgets. A fixed budget is a financial plan that does not change through the budget period, irrespective of any changes from the plan in actual activity levels experienced. The only situations in which a fixed budget is likely to track close to actual results are when:

Costs are largely fixed, so that expenses do not change as revenues fluctuate. The industry is not subject to much change, so that revenues are reasonably predictable. The company is in a monopoly situation, where customers must accept its pricing.

Types of budget
A flexible budget is a budget that adjusts or flexes for changes in the volume of activity. The flexible budget is more sophisticated and useful than a fixed budget, which remains at one amount regardless of the volume of activity. For example, if a business greatly exceeded the sales goal, it is reasonable to expect costs to also exceed planned levels. After all, some items like cost of sales, sales commissions, and shipping costs are directly related to volume.

DIFFERENCE BETWEEN FIXED AND FLEXIBLE BUDGET

particulars Fixed budget Flexible budget

a. Definition

It is a Budget designed to remain unchanged irrespective of the level of activity actually attained.

It is a Budget, which by recognizing the difference between fixed, semi variable and variable costs is designed to change in relation to level of activity attained.
It can be recasted on the basis of activity level to be achieved. Thus it is not rigid.

b. Rigidity

It does not change with actual volume of activity achieved. Thus it is known as a Rigid or Inflexible budget.

c. Level of Activity

It operates on one level It consists of various of activity and under one budgets for different set of conditions. It levels of activity. assumes that there will be no change in the prevailing conditions, which is unrealistic.

d. Performance Evaluation

Comparison of actual performance with budgeted targets will be meaningless, especially when there is a difference between two activity levels.

It provides a meaningful basis of comparison of the actual performance with the budgeted targets.

Zero-based budgeting
Zero based budgeting (ZBB) is an alternative approach that is sometimes used particularly in government and not for profit sectors of the economy. Under zero based budgeting managers are required to justify all budgeted expenditures, not just changes in the budget from the previous year. The base line is zero rather than last year's budget. In traditional approach of budgeting, the managers start with last year's budget and add to it (or subtract from it) according to anticipated needs. This is an incremental approach to budgeting in which the previous year's budget is taken for granted as a baseline. This approach is called incremental budgeting.

BENEFITS OF ZERO BASED BUDGETING PROCESS

Efficient allocation of resources, as it is based on needs and benefits.
Drives managers to find cost effective ways to improve operations. Detects inflated budgets.

Useful for service departments where the output is difficult to identify.

 Increases staff motivation by providing greater initiative and responsibility in decision-making.

Increases communication and coordination within the organization.

Identifies and eliminates wasteful and obsolete operations. Identifies opportunities for outsourcing. Forces cost centres to identify their mission and their relationship to overall goals.

Limitations of zero based budgeting process

Difficult to define decision units, as it is time-consuming and exhaustive.

Forced to justify every detail related to expenditure. The research and development (R&D)department is threatened whereas the production department benefits.

 Necessary to train managers. Zero based budgeting (ZBB) must be clearly understood by managers at various levels to be successfully implemented. Difficult to administer and communicate the budgeting because more managers are involved in the process.
Managers must be reliable and uniform. Any manager that exaggerates will adversely affect the results.