Types of Budgets

📌 Why Different Types of Budgets?

Organizations face different operational needs, resource constraints, and external uncertainties.
To address this, multiple budgeting approaches are adopted, each with a distinct purpose.

1. Flexible Budget

• Used when there is high demand or production volatility.
• Allows budgeting at various capacity levels without redoing the full process.
• Common in commercial enterprises.
• Example: Budget for 60%, 80%, and 100% utilization scenarios.

2. Zero-Based Budgeting (ZBB)

• Every budget cycle starts from scratch (zero base).
• Continuity of each activity must be justified, regardless of past allocation.
• Common in:
  • Government projects (e.g., yearly evaluation of a 5-year polio campaign).
  • R&D functions and service departments in private companies.
• Promotes discipline and accountability in budgeting.

3. Rolling or Continuous Budget

• Budget is updated periodically (e.g., quarterly) to cover the next 12 months.
• Encourages budgeting as an ongoing, integrated process.
• Helps adapt to changing business conditions throughout the year.

4. Activity-Based Budgeting (ABB)

• Based on the Activity-Based Costing (ABC) approach.
• Useful when conventional input-based budgeting fails (especially for service firms).
• Focuses on cost of activities, not just inputs like raw material or labour.
• Steps in ABB:
  1. Identify activities and calculate cost per activity.
  2. Estimate demand for activities based on targets.
  3. Compute budgeted cost of each activity.
  4. Consolidate into a total budget.

5. Kaizen Budgeting

• “Kaizen” = Continuous improvement.
• Every department must present:
  • Planned improvements
  • Resources needed (training, equipment, etc.)
• Budget performance is measured by:
  • Achievement of targets
  • Improvements made
• Makes budgeting forward-looking and development-oriented.

Combining Budgeting Approaches

Different budgets can be used together to enhance effectiveness:

• Zero-Based + Flexible Budget → For departments like R&D or Branding
• Kaizen Budgeting → Can be added to any type of budget
• Activity-Based Budgeting + Flexible Budget → Prepare flexible budgets for each activity