Understanding Budget Period | How are budget period fixed?

Understanding Budget Period

Before preparing a budget, the organization should decide the budget period. The budgeting must be related to a specific period of time. There is no clear-cut rule to select or decide a budget period. But, there must be a specification with regard to a budget period.

Definition of Budget period

According to S.P. Iyengar,

Budget period is the period for which a budget is prepared and employed.

Generally, a budget period depends upon nature and type of business. Some companies are preparing a budget for more than one year and some companies limit the period to one year.

Short-term & Long-term budgets

Seasonal industries are following budget period of one year. But in the case of heavy capital industries are following budget period of more than one year. If so, such industries can meet the requirements of the business. Even though, these types of companies are also following short-term budget along with long term budget. The short-term budgets are highly useful to exercise control over day-to-day operations. If the short-term budgets are prepared, the results are compared with the budgeted figures at every weekend or month end and discussed with the budget committee.

How long should a budget period be?

The budget period should not be too long and too short. There must be a sufficient time for preparation and implementation of budget. Hence, most of the business concerns follow annual budget i.e. one year budget. The annual budget can be easily compared with the financial accounting year.

How are budget period fixed?

The budget period may be fixed by considering the following points.

  1. Nature of the business concern.
  2. Nature of demand for the product.
  3. Type of the industry.
  4. Period of the product life cycle and trade cycle.
  5. The period of the production cycle.
  6. Functional areas covered in the budget.
  7. Need and degree of control to be exercised over operations.
  8. Time interval of budget preparation and its implementation.
  9. The accounting period of the organization.

A single company can prepare both long-term budget and short-term budget. Usually long-term budgets are planning budgets and short-term budgets are control budgets. In order to exercise control on the operation, most of the companies are preparing short-term budget.

Basic Budget, Current budget (or) Annual Budget, Continuous Budget

Basic Budget: A basic budget is defined as, “A budget which is established for use unaltered over a long period of time“.

Current Budget (or) Annual Budget: A current budget is defined as, “A budget that is established for use over a short period of time and is related to current conditions“. Current budget is otherwise called annual budget. A company prepares its budget annually, which disclose the current conditions. The budget period of annual budget is equal to accounting period of the specified concern.

Continuous Budget: A budget is prepared for short period and reviewed and modified in the light of the changing conditions continuously. Such a budget is known as continuous budget.