What are some of the different types of budgets? Describe in detail on

QUESTION

What are some of the different types of budgets? Describe in detail one type of budget covered in the text. Describe what the budget is used for and what information is provides a business.
A budget is a statement which is prepared in the beginning of a period to show the estimates of the revenues and costs during a period of time. Types of budgets are: 1) on the basis of functions- cash budget, sales budget, production budget, overheads budget, materials budget, labor budget and a master budget comprising of all of the above. 2) on the basis of flexibility-static budget and flexible budget. 3) on the basis of duration- long term and short term budgets. A flexible budget is prepared after the whole period for the actual level of activity. Thus it shows what should have been the level of revenues and costs at the actual level of activity. Hence its mainly used for comparing the standard (what should have been) results with the actual (what is) results. The¦

logic behind this type of budget is as follows: The company may have prepared a budget for the estimated output of 7000 units. However the actual output may be 8000. So it is not rational to compare the costs and revenues of 8000 units with those of 7000 units. Hence its better to prepare a revised budget for 8000 units. This revised budget is the flexible budget. Because of presence of standard and actual information, flexible budgets are used to find out the variances and thus controlling the overall performance.

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