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What is the Budget? A Brief of it

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budget calculation

The budget is described in the general sense as a precise statement that constitutes for a certain period a financial estimate of government revenues and expenditure. A budget is a quantitative statement in the cost accounting system prepare for future receipts and disbursements before a certain period.

As for budgeting, we call the integrated process of budget preparation, implementation and operation.

Features of Budget:

An estimate of an entity’s economic operations relating to a given future period is provided.

The corresponding authority must write and approve it.

Whenever circumstances change, it should be modified or corrected.

It acts as a barometer to measure the business’s performance by comparing actual and forecast results.

It is developed based on past business experiences and trends.

It is a corporate practice used to predict the company’s operational activities and financial position.

The budget is used to fix monetary objectives and, if any, to check the deviations. It can also be used for measuring the organization’s performance.

Classification of Budget:

Based on time:

Long-term budget: The management budget is called the long-term budget for three to ten years.

Short-term budget: The budget, as its name suggests, is called a short-term budget for a term of 1 to 2 years.

Based On Capacity:

Fixed budget: The budget created for the fixed level of activity is called the fixed budget, i.e. it stays unchangeable irrespective of the level of activity.

Flexible Budget: A flexible budget is a budget that changes when activity levels are changed. It identifies fixed costs, semi-variable costs and variable costs so that the results are shown in different quantities.

Based on Scope:

Functional budget:

the business budget is referred to as the functional budget. It can also be divided into:

Budget for sales: The sales budget is used to determine the anticipated sales volume and the expected sales price per unit.

Production Budget: it is ready for the specified time and is expressed in the output units produced. Production budget:

Materials Budget: The budget is prepared to show the direct material and raw material quantities necessary to produce the finished product.

Purchase Budget: The purchase budget is designed to estimate the quantity and value of the various items to be purchased at various times, taking into account the required production and inventory.

Cash Budget: the budget shows the cash needed by the company over a specified period, taking all receipts and payments of the company into account.

Master Budget:

The financial officer prepares a Master Budget once all the functional budgets have been created. It is an integrated budget reflected by the Budgeted profits & losses account and budgetary balance sheet of the enterprise the estimate of profits and losses and financial position.

Based on Receipts and Expenditure:

Capital Budget: the estimated capital receipts and expenditure for a specified period are taken into account by the Budget.

Revenue Budget: all revenue and expenditure received for the particular financial year shall be covered by a revenue budget.

The budget serves as a map for the business’s future economic activities, prepared in line with the policies of the various corporate functions. It seeks to make optimal use of the organization’s capital and other resources.

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