Budgeting is a Management Control System, which uses information to evaluate financial performance.
Types of Budget
- Fixed Budget or a Static Budget
These are based on a set volume of sales or revenues, which can be used in industries that don't change that much in the period. They can also be updated periodically. Its advantages include simplicity and ease of preparation.
- Flexed budgets
Flexi budgets change according to changes in activity. Activity measures are used once a control period is completed to generate a flexed budget. This is generally done by analyzing variable costs, contribution margin, and fixed costs. A flexed budget is compared with a fixed budget to understand variances for control purposes
- Rolling budget
This involves the incremental extension of the budget model so that the firms always have a 12-month period budget looking toward the future. The advantage is that this budgeting activity is monthly work, rather than a yearly activity. Only one month has to be forecasted incrementally to be added to an existing 11-month period. Since modifications are made monthly, this tends to lead to better budgets.