Rolling Budget Definition
Rolling budget is a continuous budget that is updated regularly when the earlier budget period expires or we can say it is an extension of existing period budget. Rolling Budget is also known as budget rollover.
Types of Rolling Budget
Below are the types of rolling budgets.
#1 – 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.
- The trend of the earlier period i.e. Average growth of last 5 – 6 years
- Total Market potential of the coming year
- Government Policies
- Seasonal demands
#2 – 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.
- Raw Material
- Labor
- Plant & Machinery
#3 – 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.
#4 – Financial Budget
In the financial budget, the enterprise has to forecast the requirement of funds for running the business whether 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.
#5 – Capital Expenditure Budget
It contains forecasting of capital expenditure like expenditure on Plant & Equipment, Machinery, Land & building, etc.
#6 – 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.
Methods of Rolling Budget
Below are the methods of Rolling Budgeting
#1 – Incremental Budgeting
In this method of incremental budgeting, the budget is prepared by adding or subtracting a certain percentage in last year’s budget on the basis of actual figures for last year to ascertain the current year budget. This is traditional budgeting.
#2 – Activity-Based Budgeting
Activity-Based budgeting is done for each activity that needs to perform to achieve the business goal and make plans to reduce the cost of activity so that profit can be maximized. E.g. If the company sets a target of $ 1000 Million sales then the company has to first identify those activities which need to perform for achieving this target.
#3 – Zero-Based Budgeting
Zero-Based budgeting will start from zero that means there is no history of any department, activity, expense head and revenue. Zero base budgeting is prepared on the inputs given by each activity manager with their experience and justification. This method of budgeting is used for cost control or assessing the potential saving of cost.
#4 – Kaizen Budgeting
This method of budgeting is used by aggressive and innovative organizations. It means continues improvement in their efficiency, quality, and productivity.
Example of Rolling Budget
Below is the example of a rolling budget.
Below is the rolling budget of Wal-Mart Inc for the year 2019 where the company is preparing a rolling budget for each quarter. This rolling budget below points has been considered in the preparation of the budget.
- Assumed Value and Volume growth at a rate of 10% for each quarter.
- Direct Material and Direct labor are the variable costs which directly related to the production of finished goods.
- Variable overhead also depends on the production like freight expenses
- Fixed overheads are not depended upon the production, therefore, it is the same for all the four quarters like Rent expenses.
The actual results of Q1 have been released. Below is the variance analysis of the Actual Budget.
Below are the observations of Variance Analysis –
- Volume and Value have achieved 105% of the Budget.
- Direct material and direct labor costs have changed according to the cost of goods sold.
- Variable Overhead has increased by 1.43% because the budgeted variable overhead was 10% of sales whereas actual variable overhead comes 11.43% of sales.
- Actual Fixed Overhead was the same as budgeted.
- Profit Margin has been reduced by 1.62% because of the increase in variable overhead.
Note
On the basis of actual performance, the company can modify the budget of next quarter if management believes that the same pattern will continue for other quarters also.
Advantages of Rolling Budget
- Rolling budget does not require more time because it is just an extension of the earlier budget with necessary changes.
- In a rolling budget, it is easy to change the budget because of any unexpected events occur.
- In this budget, it is easy to assess the actual performance against budget.
- Rolling Budget brings better understanding, responsibility, and objectives between employees of the company.
- The rolling budget helps in finding the strength and weaknesses of the organization and accordingly steps can be taken for removing the weakness.
Disadvantages of Rolling Budget
- Rolling budget requires a robust system and skilled manpower.
- The rolling budget creates confusion and disturbs the employee because of constant changes.
- Rolling budget is not advisable for those organizations where conditions are not changing frequently.
- If the target sets in budgets are difficult to achieve then it demotivated the employee of organizations.
- It is a very costly affair because it requires additional manpower for regular updating of rolling budget and analysis of actual performance vs budget.
Conclusion
Rolling budget is a continuous process of budgeting where budget is prepared quarterly/half-yearly /Early on the basis of the last budget. In rolling budget assessment is happening at the end of each budget period. Rolling budget gives clear understanding among employees about the business objective and what to do for achieving the objective. For a successful budget, it is very important that information taken for budget preparation is correct otherwise it will give a negative impact on the business as well as employees.
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