Companies use budgets to plan for their future business goals and the required financing to achieve those goals. The operating budget allows the company to plan its expected revenues and expenses for the budget period and account for any seasonal differences. Operating budgets comprise the largest segment of the budgeting process and impact employees throughout the organization.
Focus on Daily Operation
The operating budget focuses on the activities involved with the company’s daily activities. These activities include selling the product or service to customers, producing the product or performing the service and managing the corporate office activities which support the daily operation of the company. While activities outside of the daily operation occur and must be planned for, they are not included in the operation budget.
The operating budget includes several smaller budgets to create the final operating budget. These budgets are the sales budget, the production budget, the materials budget, the labor budget, the overhead budget, the general and administrative budget and the cash budget. The sales budget considers the expected sales quantity of products and the anticipated selling price of each unit during the budget period. The production budget determines the required number of units the manufacturing department must produce in order to meet the expected sales. The materials and labor budgets consider the materials and labor needed to create the required production. The overhead budget details the expenses associated with the production facility during the budget period. The general and administrative budgets detail the expenses necessary to manage the corporate office during the budget period. The cash budget reviews cash receipts and cash disbursements during the budget period and determines the company’s cash flows during the budget period.
The company creates the operating budget by assigning each component to an individual manager. The budget coordinator provides each manager with historical reports that detail the actual expenses for the prior and current period. Each manager knows the activities in her individual area and combines this knowledge with the historical data to create a new budget for their area. The budget coordinator combines each of the individual budgets into a final operating budget.
The operating budget is used to evaluate the performance of each individual manager during the period the budget applies. Actual performance is compared to the operating budget. The difference between the actual and budget amounts is a variance. Each manager must explain why the variance exists.