Parts of the Operating Budget

The operating budget consists of two parts:

  • Program budget
  • Responsibility budget

Both budgets arrive at the same figure for projected net income and return on investment. An overview of each one is given below.

Program Budget

The program budget describes the major programs that the company plans to undertake. This budget is arranged by product line and shows the anticipated revenue and costs for each product. This budget helps to answer questions such as:

  • Is the profit margin on each product line satisfactory?
  • Is production capacity sufficient to support the organization’s sales?
  • What can the company afford to spend on research?
  • Are adequate funds available?

If there are negative answers to any of these questions, the plan needs revising.

Responsibility Budget

The responsibility budget sets out budget information by responsibility areas. It is, therefore, a control device (i.e., a statement of standard performance against which actual performance can be compared).

The costs in a responsibility center will vary with volume. The responsibility budget shows the expected costs at various levels of volume. Also, responsibility budgets are prepared for a variety of other special purposes.

Frequently Asked Questions

What is the operating budget?

The operating budget is a plan of expected revenue and expenses for an organization or business. It consists of both a program budget and a responsibility budget. The program budget identifies major programs/products that the company plans on carrying out, while the responsibility budget divides costs by department and tracks performance against standards.

What is the purpose of the operating budget?

The operating budget is meant to provide a snapshot of expected revenue and expenses for an organization or business. It helps managers make informed decisions about products, programs, and costs. Additionally, it can be used as a control device to track actual performance against desired outcomes.

How is the operating budget developed?

The operating budget is developed through a planning process which includes determining the major programs/products that the organization plans on carrying out, as well as developing a responsibility center which summarizes departmental costs and performance against standards. Once this work is completed, companies can use their projections to develop an operating budget.

What are some common operating budget items?

Some common items in an operating budget include anticipated revenue and expenses by product line, department, or other specified category. Additionally, the budget may identify funds available for specific purposes such as research and development. Finally, it is also common to see a comparison of projected net income and return on investment.

Is the operating budget used to set goals?

The operating budget is used to plan future revenue and expenses. It can be used as a benchmark for measuring performance against planned outcomes. However, it is not typically used to establish goals. Instead, the company may use the budget to identify areas which need improvement prior to setting goals or establishing milestones.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

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