Types of budgets

Types of budgets

The budget is basically future estimates of revenue or cost. Budgets may be categorized into periodic budget, rolling budget, fixed budget, flexible budget, incremental budget, and zero based budget.

1.    Periodic budget

Periodic budget is prepared for a period for example for one year and does not change during the period. This budget technique is widely used by the government, once budget is prepared; it is rarely changed during the year.

2.    Rolling budget

 Rolling budget is also known as continuous budget and budget is updated after a specific period of time. The concept is that budget is updating after some period of time. The advantage of this method is that budget is regularly updated and new situation incorporated in the budget, however this type of budget has little budgetary controls.

3.     Fixed Budget

A fixed budget does not change with level of activity. For example a construction manager has prepared a fixed budget for the construction of a bridge and site manager require completing the construction work within this budget. The fixed budget has no answer in certain situation where the budget depends on the level of activity.

4.    Flexible budget

A flexible budget changes with level of activity.  i.e (number of unit produced). For example for 10,000 units the production cost was 18,000 and for 12,000 unit production cost was 20,000. This budget is more practical approach of budgeting because budget are prepared for operation and activities and this method give due consideration to level of activity.

5.    Incremental Budget

The incremental budget use the last year budget as base and the incorporate inflation and other factor in that budget in that and thus a new budget is prepared. Main Advantages of incremental budget simple and time saving. The main disadvantage of incremental budget is bias of manager responsible for operation budgets; budget may be prepared to achieve the desired results.

6.    Zero Based Budgets

Zero based budgets are prepared from the scratch and every objective is to be redefining and every expense is to be re justified. This concept try to eliminate the wrong projection and encourages to prepare the budget on facts and not merely the changing the number in excel sheet. The biggest limitation of Zero based budget is time consuming.