Continuous (Rolling) budgets

4th August 2021 0 By indiafreenotes

A rolling budget is continually updated to add a new budget period as the most recent budget period is completed. Thus, the rolling budget involves the incremental extension of the existing budget model. By doing so, a business always has a budget that extends one year into the future.

It’s is a new, revised set of financial plans for the next accounting period used to replace the prior one in a continuous budgeting system. In other words, it’s a newly updated budget that takes the place of the old version when it expires.

A rolling budget calls for considerably more management attention than is the case when a company produces a one-year static budget, since some budget updating activities must now be repeated every month. In addition, if a company uses participative budgeting to create its budgets on a rolling basis, the total employee time used over the course of a year is substantial. Consequently, it is best to adopt a leaner approach to a rolling budget, with fewer people involved in the process.

Advantages and Disadvantages of the Rolling Budget

This approach has the advantage of having someone constantly attend to the budget model and revise budget assumptions for the last incremental period of the budget. The downside of this approach is that it may not yield a budget that is more achievable than the traditional static budget, since the budget periods prior to the incremental month just added are not revised.

Types:

Sales Budget/Revenue Budget

Sales Budget the very first budget that an enterprise has to prepare because all other budgets depend on the revenue budget. In this budget, enterprises are forecasting their sales in terms of Value and Volume. In preparing the sales budget below, factors have been considered by the sales manager.

Master Budget

A master budget is a summary of all the above budget, which is verified by top management after taking inputs from various functional heads. It also shows the profitability of the business.

Capital Expenditure Budget

It contains forecasting of capital expenditure like expenditure on Plant & Equipment, Machinery, Land & building, etc.

Financial Budget

In the financial budget, the enterprise has to forecast the requirement of funds for running the business, whether it is long term or short term. In this budget, the company is also planning to invest their excess cash in that manner so that they can get a maximum return, or if the money is required for business, then they can pull out that money from the investment easily.

Overhead Budget

In this budget, enterprises are estimating the cost of indirect material, indirect labor, operational cost like rent, electricity, water, traveling, and many others. The overhead budget is divided into two parts one is fixed overhead, and one is variable overhead. It is also known as the expense budget.

Production Budget

The production budget purely depends upon the sales budget. In the production budget product manager estimates the monthly volume production according to the demand and also maintains the inventory level. In this budget, the cost of production is also estimated. Below are the factors of the production budget.

  • Labor
  • Raw Material
  • Plant & Machinery

Factors:

Fixed Expenses

Fixed expenses are easy to forecast. It has most compelling evidence. As an illustration, office or factory rent is easy to predict. There is a remote possibility that it will change.

Variable Expenses

Variable expenses vary based on the volume of the production and sales. Hence, variable expenses can be updated regularly. The volume of sales and production is decided on the external factors and internal factors.

Other Expense

Following expenses are also considered:

  • Interests paid on loan from the bank.
  • Payment to shareholders by way of dividends
  • Any other non-operational expenses