The Different Types of Operating Budgets and How They Can Help Your Business

Identify and briefly discuss types of operating budgets. 

Operating budgets are the individual budgets that result in the preparation of the budgeted income statement. They are the plans used by the management to generate income and incur expenses over the duration of the budget. While operating budgets are effective for one financial year, they are subject to changes if the anticipated costs or revenues change significantly from the expectations. The operating budgets comprise the budgets for sales, manufacturing costs, selling expenses, and general and administrative expenses. 

Sales Budget 

When creating a comprehensive budget for a business, you begin with a sales budget. It comprises the total number of units on sale and the selling price of each. Most of the other budgets are dependent on the data of the sales budget, which makes it imperative to first agree on its figures. The components of a sales budget are simple. However, the process of getting the management team to agree on the details is often time-consuming. Imagine a Dolls Company that makes Barbie dolls and it expects to sell 100,000 toy trucks each $15.00 in one year. The sales budget for the company on a quarterly basis will be as follows:

Dolls Company Sales Budget for the year ended December 31, 20X1

Manufacturing Costs 

The manufacturing costs include direct labor, direct materials, and manufacturing overhead budgets. When preparing the manufacturing costs, it is important to first complete the production budget.

The Production Budget 

It indicates the number of units that should be produced. In this case, three things should be known: the number of units that need to be sold, number of units at the beginning of the inventory, and the required inventory level at the end of the year. Using the Dolls Company’s quarterly sales budget with an assumption that 15% of the next quarter’s sales volume should be in the inventory before the quarter begins, we can create the production budget by a quarter. It is further assumed that there are 2,250 units in the inventory at the start of the year

Direct Materials Budget 

It determines the number of units of the raw materials that need to be purchased. It requires information about the number of units that need to be produced according to the production budget, the number of units at the start of the inventory, and the required ending inventory for raw materials. After determining the number of units to be purchased, you multiply it by the cost per unit, and this gives the budgeted amount for purchasing the raw materials.

Direct Labor Budget 

It is the number of direct labor hours and the cost of one labor hour, and it is used to determine the total cost of direct labor.

Manufacturing Overhead Budget 

It is used to identify the expected fixed and variable overhead costs for the financial year (or period) being budgeted.

Selling Expenses Budget 

The selling expenses budget comprises of the fixed and variable selling expenses. In this case, the variable expenses are usually based on the total sales.

The General and Administrative Expenses Budget 

The general and administrative expenses budget contains information regarding the variable and fixed operating expenses for the administrative and general areas of the company.

References 

Kubasek, N., Browne, M., Herron, D., Dhooge, L., & Barkacs, L.  Dynamic business law . 

Operating Budgets and Income Statements – Basic Kitchen and Food Service Management. (2018). Retrieved from https://opentextbc.ca/basickitchenandfoodservicemanagement/chapter/operating-budgets-and-income-statements/