Budgeting is important for all be it businesses big or small. This write up introduces types of budgets and their benefits.

1. Budgeting
AS per C IMA “A budget is a quantitative expression of a plan for a defined period of time. It may include
planned sales volumes and revenues, resource quantities, costs and expenses, assets, liabilities and
cash flows. It expresses strategic plans of business units, organizations, activities or events in
measurable terms”
Budgeting is thus, an important tool for financial planning and control in the organisation.
The budgeting process varies from organisation to organisation on the difference in management style,
organisational objectives, structure of competition, nature of work etc. The following are some of the
common steps to be adopted in building a budget:
1. Obtaining estimates of sales, production levels, expected costs, and availability of resources from each
department – These estimates are obtained from the departmental heads of the company.
2. Coordinating estimates – Various estimates obtained from the different units of an organisation are
evaluated as a whole and future estimates for the entire company are laid down. Upon estimating the
future performance of the company, available resources are allocated among the various activities.
3. Communicating the budget to responsible managers and concerned departments – Approved individual
budgets, are communicated to the concerned managers. Any changes and modifications to the final budget
should be made known to the managers to obtain their support.
4. Implementing the budget plan – The final budget must be properly implemented by all concerned
departments.
5. Reporting progress towards budgeted objectives – As feedback, performance reports are prepared to
inform departmental managers and the top management about the targets achieved in relation to the
budgeted figures. Based on the feedback, corrective actions for the future can be taken.
The budget period
The budget period assumes importance for planning an organisation’s future activities. The length of the
budget period depends on the type of business, the length of the business cycle from the raw materials
stage to the finished goods stage or in case of services firm from conception to delivery of services , the
ease or difficulty of forecasting future market conditions. Generally companies prepare two ranges of
budgets: short range and long-range.
Short-range budget- Short-range budgets cover around three, six months or one year periods.
Manufacturing firms for instance, consider one year as their budget period, while wholesale and retail firms
usually employ a six-month budget period. In determining the period of the short-range budget, the
following factors should be considered:
 The budget period must be long enough to cover complete production of various products
 For business of seasonal nature, the budget period must cover at least one entire cycle
 The budget period must be long enough to allow financing of production well in advance of
actual needs
 The budget period must coincide with the financial accounting period to compare actual results
with the budgeted estimates and thus implement corrective plans
Long-range budgets- A long-range budget is defined as a systematic and formalised process for directing
and controlling future operations towards a desired objective for periods extending beyond one year. Such
budgets cover specific areas like future sales, production, long-term capital expenditure, extensive
research and development programmes. These budgets help in making correct present decisions and
evaluating future implications associated with present decisions
Several factors such as market trends, economic factors, growth of population, consumption pattern,
industrial production, national income, government, and economic and industrial policy are considered
while preparing long-range budgets. Based on these parameters, the future sales for the company are

2. forecasted, on the basis of which, projected profit and loss account and the balance sheet are prepared.
These projected financial statements help in guiding the organisation’s activity towards its future
objectives.
Fixed and flexible budgets
Fixed budgets
A fixed budget is defined as a budget, which is designed to remain unchanged irrespective of the level of
activity actually attained. It is based on a single level of activity. Fixed budgets do not change when the
level of business activity changes.
In practice however, fixed budgets are rarely used, as the actual output is different from the budgeted
output. In such a case, the budgets cannot be used as a tool of cost control. The performance report
prepared on the basis of the budget will be misleading and will not reflect the correct position. For instance,
if the actual production is 12000 units as against the budgeted 10000, the production costs incurred in
reality will be higher than the budgeted figures. Since, fixed budgets do not account for s uch differences
in production levels or business activity, costs will be projected as going above the budgeted figure. The
performance report prepared on this basis shows that the actual costs are higher than the budgeted costs.
Hence the actual picture of business activities is not reflected.
Flexible budgets
A flexible budget is a budget that is prepared for a range i.e. for more than one level of activity. The
flexible budget is also known as a variable, dynamic, sliding scale, step budget. The underlying principle
for a flexible budget is that every business is dynamic and ever changing. Thus, a flexible budget is
developed for a range, say 8000-10000 units of production. Under this approach, if the actual production
is 9000 units compared to the projected amount of 10000 units, the manager uses the flexible budget to
project the costs for 9000 units of output in place of the budgeted 10000 units. The flexible budget covers
a range of activity, is easy to change with a variation in production lev els, and thus facilitates correct
performance measurement and reporting.
Steps in flexible budgeting
The following steps are involved in developing a flexible budget: -
1. Deciding the range of activity to which the budget is to be prepared
2. Determining the cost behaviour patterns (fixed, flexible, semi-variable) for each element of cost to be
included in the budget
3. Selecting the activity levels in terms of production levels to prepare budgets at those levels
4. Preparing the budget at the pre-determined level of activity
Advantages of flexible budgets
The following are the main advantages of a flexible budget:
 Accurate budgeting- Flexible budgets result in the preparation of more accurate budgets. Such
budgets consider the output and accordingly estimate the costs to be incurred at that level of
output
 Accurate performance measurement- Flexible budgeting incorporates changes in activity levels
and compares actual performance with the budget in terms of output achieved. This facilities more
meaningful comparison and evaluation of performance.
 Coordination- Flexible budgeting results in proper coordination between various departments of a
company. For instance, if production is planned in relation to estimated sales, materials and labour
are acquired to meet expected production needs
 Control tool- Such a budget acts as a control tool. Comparisons between the budgeted costs (at
the actual production level) and actual costs form the basis for analysing cost variances and fixing
responsibility for the same.