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Explain budget and types of budget.

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Explain budget and types of budget.

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  • 04/02/2019

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Budget – A financial plan for a specified period is known as Budget. Budget include planned revenues and sales volume, income & expenditure, assets & liabilities, cash inflows & outflows. A company may implement the budget of their organization annually.   

The 4 different types of budgets are shown as following-

a)      Master Budget- In order to accomplish the activities of any organization, Master Budget is the central planning tool which includes the allocating of funds. Master Budget presents the complete picture of the Financial performance of the business.

b)     Financial Budget- To meet the need of short term, medium term and long term funds of the organization, financial budget has been used. Financial Budget is prepared to manage the company’s assets, cash flows, expenses, and income.

c)      Operating Budget - Operating Budget involves different type of costs. These costs are- production cost, working cost, labor cost, overhead cost etc. This budget is implemented to forecast and analyze the projected income and expenditure. 

d)     Cash flow- Cash flow budget is used to manage the Cash inflow and outflow within a specified period of time of the organization.

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A Budget of the organization can be defined as a sum of money allocated for a particular purpose in order to meet the expenditures of the company. It is a type of tool which forecasts the revenues and expenditures and forms the well -established strategies, plans and procedures.

Types of Budget

a)      Sales Budget – A budget which comprises an estimation of total sales expenditure and total sales revenue is called sales budget. The factors that affects the sales budget are – past sales trend, economic conditions, seasonal fluctuations, competition etc.  

b)     Production Budget – Production budget is made by considering the activities of sales budget. This budget comprises the stock levels and manufacturing programs of any enterprise.

c)      Overhead Budget – Overhead budges comprises the estimation of Indirect materials, Direct materials and Indirect labor expenses. The manufacturing overhead is also involved in this type of budget which is based on three categories such as variable, semi –variable and Fixed overhead. 

d)     Financial Budget – The budget which shows the requirements of capital for both short term and long term needs of an entity is known as Financial budget. It involves the receipts and payment of cash over the specified period of time.

e)      Personnel Budget – Personnel budget entails the manpower requirements (labor requirements in terms of labor cost, labor hours and grade of workers) over the specified budget period.  

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Meaning of Budget – Budget helps in measuring the past performance of the business and predicting the future performance of the business. It tracks and manage the resources of the business.

The different types of budget are explained as –

a)      Master Budget – A Master budget is used to aggregate the company’s Individual budget in order to represent the Financial health and activity of an enterprise. Master Budget is always used in larger companies.

b)     Operating Budget – Operating Budget is used to forecast the Income and expenditure over a specified period of time. This type of budget often created on weekly, monthly and yearly basis. 

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