Shelton Business Services: Advancing business ability with proven executive coaching, objective management consulting and reliable financial servicesA master budget rolls up financial and operating projections from various departments within the company. Some companies use sophisticated spreadsheets or budgeting software to drill down into the data when evaluating budget variances during the year. Your business budget can be as simple or complex as your situation and resources dictate.

As I mentioned in the last post The master budget is made of:

  • Operating budget: An estimate of unit sales, production and materials requirements for the upcoming period.
  • Financial budget: The budgeted income statement is prepared using the production budgets and the operating expenses budget.

This post will take a deeper dive into the operating budget.

How are operating budgets prepared?

A company operating budget is prepared using input from the departments that drive revenue or use cash. The examples below are related to a manufacturing business. A service or merchandising business will use some but not all of these budgets:

  • Sales budget: The projected sales come from the quantity of product that will be sold times the estimated selling price. These numbers come from historical results and forecast adjustments for inflation and market conditions. Estimate cash and credit sales to prepare the bad debt expense estimate in the budgeted income statement.
  • Production budget: The amount of product to manufacture is derived from the sales budget with allowances for the desired ending inventory of finished goods each month. Companies usually want some inventory on hand to meet unexpected demand.
  • Direct materials budget: The purchasing manager uses the production budget to budget for materials to meet production each month. An allowance for stock inventory of raw materials is usually made so the production line can keep rolling without delays for out of stock conditions.
  • Manufacturing Overhead (MOH) budget: The plant manager estimates overhead costs using the production budget. MOH includes variable costs such as indirect labor and materials which fluctuate based on production volume. Fixed MOH includes costs that are incurred whether or not any products are manufactured. The costs include plant depreciation, property taxes and insurance, indirect labor related to fixed overhead and some of the plant utilities.
  • Operating expenses budget: These expenses are not related to what happens inside the manufacturing plant but are necessary costs of doing business. Variable operating expenses include shipping costs, bad debt and marketing costs. Fixed operating expenses include depreciation on the office building, advertising, utilities for the office space and non-manufacturing payroll costs.

Next post we will see how all of these budgets come together to paint the financial projections for the budget year.


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