What Are the Basic Types of Operating Budget?
Operating budgets are an important part of a company's activities because they indicate the cost of day-to-day operations during a given period. While the exact type of operating budget a company uses may vary based on its specific business needs, the most common types are the expense, revenue and profit budgets.
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Expense
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An expense budget includes costs associated with the day-to-day operations of the company. Companies in the manufacturing industry may include an engineered cost budget in their expense reporting. Any organization. however, that needs to accurately measure output and describe material and labor costs involved in the production of goods may use this expense subset. Discretionary budgets, such as those used for administrative, legal, accounting, research or other departments, are also included in the expense budget.
Revenue
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A company's revenue budget is used to measure the overall effectiveness of marketing and sales. It is devised based on the amount of sales the company expects to make during the budget period multiplied by each goods selling price. Even though both predictions are uncertain -- since they are based on projected future sales -- their accuracy is critical in the creation of a comprehensive profit budget. A company that overestimates its revenue budget may have trouble meeting operational expenses.
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Profit
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Profits are defined as the amount of money a company has after subtracting its costs from its revenue. Therefore, a profit budget is a combination of the company's expense and revenue budgets condensed into one financial statement. It is commonly used by managers with responsibility for expenses and revenues within their departments, and may also be referred to as a master budget. Profit budgets are utilized as projected financial statements and schedules for the coming year -- when the previous year's profits are used.
Income Statement
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All of the information included in the company operating budget is reflected in the income statement. The income statement, which is used by accountants and management, serves as a key indicator of the overall financial health of the company. Profit and revenue budget information are referenced in the revenues and gains portion of the income statement, while expense budget information is included in the expenses and losses part of the income statement. A company with a relatively low operating budget will generally be more profitable, and have a higher net income.
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