Assignment on the Budgeting and Types of Budget

Benefits of Budget: The key benefits of budgets are stated below:

1)      The budgets are really important for the decision-making process. Mr Ali can use the budget to take future decisions about the cost control strategies or expansion in the revenue streams (Accaglobal.com, 2020).

2)      The budget is also beneficial for Mr Ali as he can use it to estimate the requirement of new funds to execute future business operations.

3)      The key benefit of the budget for Mr Ali is to measure the performance of the company and managerial efficiency towards future planning and resources management.

Different Types of Budget: Mr Ali need budgets for the decision making the process of the future business operations in his company. There are several types of budgets that can be used for such purposes in the organization. Some common but most suitable types of budgets are stated below.  These budget types can be used by Mr Ali for his business. 

Static Budget: The budget in which the amounts will not change even with significant changes in volume (Accountingcoach.com, 2020).

Flexible Budget: A budget adjusted with a change in activity or volume. 

Zero based Budget: A budget with zero bases and no references for previous year performance.

Traditional Budget:  The budget developed on an incremental basis which uses previous year performance as a base.

Actual Budget: The budget prepared by the use of actual sales and cost-related information to measure the performance of the company.

Furthermore, Mr Ali can prepare budgets for different time durations. For instance, budgets can be developed for a yearly, quarterly, or monthly basis.

Yearly Budget: A budget that shows yearly cost and revenue values.

Quarterly Budgets: A budget that represents the one fourth (3 months) information of a company.

Monthly: The monthly projection of sales and cost.

Preparation of Budget: In this report section, static, flexible, zero based, and traditional budgets are developed based on the shared case scenario.

Static and Flexible Budget: The flexible budget is developed with adjustment of changes occurred in the activity and sales volume. The following budgetary steps are taken for the development of a flexible budget.

1)      The cost and expenditure are updated in accordance with the change in the volume.

2)      The fixed cost for rent and other expenses are calculated with a 10% increase for inflation rate after every 2 years.

Table 1 Flexible Budget

The static budget is prepared by using a single level of output for the given period. For each year some budgeted sales volumes are selected that will have no impact on the budgeted per unit cost. The static budget is developed while considering the following assumptions and budgetary steps:

1)      A static budget is developed while using the previous year per unit cost as a budgeted cost for the estimated sales volume each year.

2)      The sales per unit are increased from OMR3.55 to OMR 4.5 in a three-year duration.

See the following table for the static budget. In this table, the company will have a slight change in its sales and operating income while the fixed cost will remain the same over the period.

Table 2 Static Budget

The following table represents the key difference between flexible and static budget. Flexible budget and static budgets are developed for a three year duration starting from 2020 to 2022. The variance for sales is positive and favourable for the company. While on the other hand, the variance calculated for fixed cost seems slightly unfavourable. However, the variance columns presented in the following tables represent the difference between the flexible and static budget for the given case scenario.

	FB 2020			FB 2021			FB 2022
	FB	SB	Variance	FB	SB	Variance	FB	SB	Variance
Sales	24000	21300	2700	26000	23075	2925	31500	24850	6650
Variable Cost
Direct Material & Direct Labor
Cost of Sales	9000	7200	1800	9750	7800	1950	11200	8400	2800
Overhead
Utilities	1020	900	120	1105	975	130	1260	1050	210
Salary	3000	1200	1800	3250	1300	1950	4200	1400	2800
Total Variable Cost	13020	9300	3720	14105	10075	4030	16660	10850	5810
Contribution Margin	10980	12000	-1020	11895	13000	-1105	14840	14000	840
Fixed Cost
Rent	500	500	0	550	500	50	550	500	50
Other Expenses	700	700	0	770	700	70	770	700	70
Total fixed cost	1200	1200	0	1320	1200	120	1320	1200	120
Operating Income	9780	10800	-1020	10575	11800	-1225	13520	12800	720

Table 3 Difference between Static and Flexible Budget

            Considering the above stated table, the variance values between flexible and static budget are negative for the first two years and positive for the last third year. Such a difference indicates that flexible budget requires more funds as compared to the static budget. Moreover, it also shows how changes made in the cost in accordance with the inflation rate and similar external environmental factors represent a more realistic overview of the overall cost and profit for the company in comparison to a static budget that does not count such factors.  

Traditional and zero-based Budget of Budgeting and Types of Budget

            The zero based budget and traditional budget are developed for the companies goal to increase sales revenue for the company. The company has developed a goal to increase its sales by the next three years. Considering this, a new plan is created to introduce a new product in the market to increase revenue. The zero-based budget is prepared from the start on this plan without considering any previous information about costs and sales record of 2019.

Table 4 Zero Based Budget

The traditional budget is developed on a 5% annual incremental basis. For each year 5% of sales and cost are increased. Regarding this, sales and cost of each year are added with the growth rate of the previous year.

Traditional Budget
	2019	2020	2021	2022
Sales	OMR 17,750.00	OMR 18,637.50	OMR 19,569.38	OMR 20,547.84
Variable Cost
Direct Material & Direct Labor
Cost of Sales	OMR 6,000.00	OMR 6,300.00	OMR 6,615.00	OMR 6,945.75
Overhead
Utilities	OMR 750.00	OMR 787.50	OMR 826.88	OMR 868.22
Salary	OMR 1,000.00	OMR 1,050.00	OMR 1,102.50	OMR 1,157.63
Total Variable Cost	OMR 7,750.00	OMR 8,137.50	OMR 8,544.38	OMR 8,971.59
Contribution Margin	OMR 10,000.00	OMR 10,500.00	OMR 11,025.00	OMR 11,576.25
Fixed Cost
Rent	OMR 500.00	OMR 525.00	OMR 551.25	OMR 578.81
Other Expenses	OMR 700.00	OMR 735.00	OMR 771.75	OMR 810.34
Total fixed cost	OMR 1,200.00	OMR 1,260.00	OMR 1,323.00	OMR 1,389.15
Operating Income	OMR 8,800.00	OMR 9,240.00	OMR 9,702.00	OMR 10,187.10

Table 5 Traditional Budget

The difference between traditional budget and zero based budget is that traditional budget is usually developed with the previous year while the zero based budget does not count the previous budget. Zero-based budget only concerns with the new estimations regarding the possible cost and expenses required to execute a business operation.

Recommendations of Budgeting and Types of Budget

           Budget control is essential for companies to develop a realistic budget. Mr Ali can also take advantage of budgets if proper control strategies are employed. Based on the analysis the following recommendations are developed for Mr Ali regarding budget control.

1)      Mr Ali should control the fixed cost of operations in the budget by the increase in the number of units sold as it can provide financial leverage to the company.

2)      Mr Ali should compare all budgets (flexible and static budget) with the actual budgets after the end of the business operations or after the completion of the fiscal year. The comparison with the actual budget will enable him to understand what materials or MOH are required to be controlled for an increase in operating profit.

3)      Mr Ali should use monthly budgets as well to collect maximum information about the changes occurred in the business operations on a seasonal basis. Sometimes, sales get influence from the seasonal basis (if the product is a seasonal product). Therefore developing a monthly budget can provide more realistic information about business operations. Moreover, Mr Ali can use these monthly budgets for the budgetary control for an annual or future period (Peekadvisory.com, 2020)  (Openstax.org, 2020).