The relevance of budgets when it comes to the management of organizational operations cannot be overstated. In this text, I discuss the various types of budgets. In so doing, I will make use of a hypothetical company by the name ABC Industries — a Texas-based manufacturing entity. ABC produces blankets.
Types of Budgets
Budgets can be classified in numerous ways. The classification approach I adopt in this case is largely founded on the nature of an organization and its unique needs. To begin with, budgets can be classified on the basis of production flexibility. Under this classification, budgets could either be fixed or flexible. A fixed budget in the words of DuBrin (2011) “allocates expenditures based on a one-time allocation of resources.” On the other hand, a flexible budget according to the author “allows for variation in the use of resources on the basis of activity” (DuBrin, 2011).
Budgets can also be classified on the basis of coverage or function, i.e. financial budget or operating budget. As Hansen, Mowen, and Guan (2009) point out, operating budgets focus on a firm’s income generating activities. Such activities include purchasing, production, sales, etc. When it comes to financial budgets, the focus is on cash inflows/receipts and outflows/disbursements (Hansen, Mowen, and Guan, 2009). Budgets of this nature are also concerned with not only the financial position but also the results of an entity’s operations.
Next, budgets could also be short-term or long-term. This classification seeks to classify budgets on the basis of period. Whereas long-term budgets are prepared to cover longer periods of time, i.e. more than one year; short-term budgets seek to cover a shorter period of time, i.e. A quarter of a year. According to Crosson and Needles (2010), an organization’s information needs are the primary determinants of the budget period to be adopted. Examples of long-term budgets in this case include but they are not limited to capital expenditure budgets, etc. On the other hand, cash budgets could be prepared to cover a period of less than one financial year.
The Best Type of Budget for my Selected Company
As I have already pointed out in the introductory section, ABC Industries is a manufacturing entity. In that regard, the type of budget I make use of in this case must be best suited for an entity of its kind. For that reason, I settle for function or coverage-based budget. Here, the two kinds of budgets to be prepared are financial and operating budgets as highlighted by Crosson and Needles. Assuming that ABC Industries has an income of 1 million per year, I will in this case be required to first develop an operating budget and then a financial budget. One of the key components ABC’s operating budget will be the sales budget. In this case, I will make use of a sales forecasting technique commonly referred to as “bottom-up.” Here, sales figures that will be aggregated to form the sales forecast will be solicited from the people in the field. The development of the sales budget will be followed by the creation of a production budget. This will tell me how many blankets we need to produce during the budgeting period. Afterwards, I will develop direct materials purchases, direct labor, and overhead budgets. To be able to compute our product’s per unit cost, I will be required to come up with an ending finished goods inventory budget. The last two steps before I have all the information I require to develop a budgeted income statement are the creation of a C.O.G.S budget and a selling and administrative expenses budget. After developing the financial budget, I will be able to arrive at the net profit figure.
Type of Calendar to Be Selected
The budget cycle of ABC Industries will be set for 12 months. This will then be broken down into quarters so as to minimize errors associated with an extended budgetary period. The time period I settle for above makes this a fiscal-year budget.
In addition to helping in the monitoring and control of operations, budgets come in handy in the appropriate allocation of resources within an organization. For this reason, they remain highly relevant in managerial accounting. A well-composed budget will be of great use to the top executives of ABC Industries in their planning, forecasting, and review activities.
Crosson, S. & Needles, B.E. (2010). Managerial Accounting (11th ed.). Mason, OH: Cengage Learning.
DuBrin, A.J. (2011). Essentials of Management (9th ed.). Mason, OH: Cengage Learning.
Hansen, D.R., Mowen, M.M. & Guan, L. (2009). Cost Management: Accounting and Control (6th ed.). Mason, OH: Cengage Learning.
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