Operating Budget

A budget is a projection of any expense or income for a particular period of time. The time frame may be a month or a year. A budget is a tool which is helpful for individuals or any organizations. It indicates the business owners’ goal that where they want to take their company in the upcoming period. For instance, if the operating budget is for a period of a year, the same is sub-divided in further parts such as a quarter or a month.

Meaning of Operating Budget

The operating budget is a detailed statement showing all the operational expenses to be incurred and incomes to be generated during a particular period of time. Operating expenses such as expenses on raw material purchases, processing cost, interest on a loan, the salary of the staff, maintenance of the office, administrative expense are considered for the purpose of operating budget. The operating income such as revenue from operations and income by sale of the by-product is considered for the purpose of operating budget.

Depending on the size, structure, and nature of the organization, operating budget may be sub-divided for the purpose of detailed understanding of the budget.

How is the Budget Prepared?

Operating Budget is prepared by considering many factors and assumptions. Below are some of the factors which are used for preparing a budget for the organization.

  • Past trend in sales
  • Past trends of the purchase price of the raw material
  • Changes in the tax laws and government regulation with respect to the industry
  • Overall economy

Based on the above factors, sales or income budget is developed at first. The reason is all the expenses shall be based on the sales projection made by the organization.

Operating Budget

Once the budget for sales or income is developed, the expense budget is prepared. The expenses have to be estimated based on the sales and the past trends in the tax regulations, interest rates on borrowing. There are three types of expenses;

  • Variable cost – these cost changes with the change in sales.
  • Fixed cost – the fixed overheads which remain fixed such as rent of factory or machinery is fixed irrespective of the production.
  • Semi-variable cost – these are the cost which is fixed for certain level. However, it becomes variable after reaching a certain point. For example, a minimum wage of the marketing staff is USD 2,000 and if the sales increase above a certain limit, the commission shall be based on a percentage of sales.

Financial Accounting helps in developing the operating budget in many ways.

Example of Operating Budget

CodeDescriptionActual Expenditures 2016Actual Expenditures 2017Operating Budget      2018
Operational Income
1000Revenue from operations79,31,28588,05,06397,79,995
 (Total : A)79,31,28588,05,06397,79,995
Operational Expense...
5082Cost of Goods Sold39,65,64344,02,53248,89,998
2012Employee Benefit Expense – Salaries and Wages24,84,14428,18,13530,81,575
2022Staff Welfare costs1,17,4111,18,4881,13,843
2032Rent-Building4,11,3244,21,6074,32,147
2043Professional Fees and Services3,45,7813,83,4513,51,157
3052Rent-Machine and other41,32442,35743,416
4064Travel1,51,1321,53,1881,54,345
4075Marketing Expenses50,30553,12354,054
(Total : B)75,67,06483,92,88191,20,535
Profit before tax (A-B)3,64,2224,12,1826,59,460

Notes:

  1. The budget is for example purpose only.
  2. Both actual and operating, revenue from operations and various expenses are assumed figures only.
  • The actual expense and revenue may vary from the industry to industry and for all the companies.

Importance of Operating Budget

Let us discuss why is it important to have an operating budget for an organization? There are broadly two important reasons which are mentioned below:

Tracks Incomes and Expenses

The operating budget helps in keeping a track of the income and expenses. It controls the expenses while it also encourages working hard and achieving the ambitious target of sales.

Improves the Efficiency

Operating budget improves the overall efficiency of the organization. It helps in operating the plant at its optimal capacity. It also guides the staff to have better and efficient planning in performing the business functions apart from making them accountable. The operating budget may be categorized in a deficit budget, balanced budget, surplus budget based upon the actual performance for the period.

Last updated on : September 22nd, 2018
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