Strategic Management: Formulation and Implementation

Types Of Budgets

There are many types of budgets. They may be classified into several basic types. Most organizations develop and make use of three different types of budgets: operating budgets, capital expenditures budgets, and financial budgets.

Operating Budgets

An operating budget is a statement that presents the financial plan for each responsibility centre during the budget period and reflects operating activities involving revenues and expenses. The most common types of operating budgets are expense, revenue, and profit budgets.

Expense Budget
An expense budget is an operating budget that documents expected expenses during the budget period. Three different kinds of expenses normally are evaluated in the expense budget - fixed, variable and discretionary (Discretionary expenses - costs that depend on managerial judgment because they cannot be determined with certainty, for example: legal fees, accounting fees and R&D expenses).
Revenue Budget
A revenue budget identifies the revenues required by the organization. It is a budget that projects future sales.
Profit Budget
A profit budget combines both expense and revenue budgets into one statement to show gross and net profits. Profit budgets are used to make final resource allocation, check on the adequacy of expense budgets relative to anticipated revenues, control activities across units, and assign responsibility to managers for their shares of the organization's financial performance.