Budgeting Terms, Some Concepts About It: A budget is a quantitative plan for resource acquisition over a certain period. Individuals often create household budgets that balance their revenues and spending for food, clothing, housing, etc.
When the budget is drawn up, actual expenditure is compared with the funding to ensure that the plan is followed. Companies use budgets the same way, although the workload and the primary data far exceed a personal budget.
Hence the term master budget in an organization refers to the summary of plans for a company, including certain sales, manufacturing, and financing objectives.
Budgeting Terms, Some Concepts About It
Temporary Budget Types
Budgets can be divided into two types based on time factor;
- Language budget, and
- The budget is short.
- Budget for the long term
Hence this budget covers the organization’s planning operations for a period of 5 to 10 years. Due to unpredictable factors, the long-term budget adversely affect.
The long-term funding should therefore supplement with short-term budgets from a control point of view.
Example: Budget Research and Development, Capital Estimates, etc.
Budget For The Short Term
Usually, for one year, this budget is drawn. Sometimes, a budget prepare (like monthly budget, quarterly budget, etc.). Hence the short-term budgets are detailed and help to monitor day-to-day activities—these budgets.
Budget Types Based On Terms
A budget classify into two types, depending on the conditions prevailing;
- Budget basic, and
- Current Estimates.
- Budget Basic
A total budget is call as the Basic Budget over a long period.
This budget does not consider changes that occur outside the management’s control from the external environment. For top management in policy formulation, this budget is more helpful.
The current budget is a budget that is design for use for a short period and is connect to existing conditions. This budget is adjust following the existing business conditions.
Function-Based Budget Types
Budgets divide into two types base on the activities or functions of a company.
- The budget master, and
- Budgets functional.
- Budget Master
Hence the master budget provides for the ultimate integration of all available budgets. The budget officer prepares the master budget when operating budgets are complete.
The Master Budget is the summary budget that includes its functional budget component, finally adopted and used.
The master budget reflects the business’s financial profit and budgetary balance sheet for the budget and the end of the budget. The overall plan for the budget is present in this budget.
Budgets cover functions such as product sales etc. Functional budgets. In other words, operating budgets are prepare for various business functions.
Functional budgets typical to a company are the following;
- Budget for sales.
- Budget for production, Material, Labor.
- Overhead Budget for production.
- Overhead budget administration.
- Budget for Sales & Distribution, for plant and cash.
Budget For Sales
In preparing the master budget, the sales budget is the starting point. The sales budget is built by increasing the sales price of the budget unit.
After the sales budget, a schedule is develop of expect cash collections. It is necessary to prepare the cash budget later on.
Cash collections consist of credit sales collections for customers in previous periods, plus sales collections from the current budget period.
Budget For Production
Hence after the sales budget, the production budget is prepared. Therefore production budget lists number of units to meet the sales requirements and provides the desired final inventory.
Budget For Cash
There are four main areas in the cash budget:
- Section of receipts.
- Section of payments
- The excess cash or shortfall section.
- The funding area.
The receipts section lists all the cash inflows expected during the budget period, except financing. Generally speaking, sales are the primary source of income.
All cash payments plan for the budgetary period are summarise in the payments section.