Parts of Operating Budget
The operating budget has two parts: a ‘program’ budget and a ‘responsibility’ budget. Both arrive at the same figure for projected net income and return on investment.
i. The program budget
This describes the major programs that the company plans to undertake. This budget is arranged by product line and shows the anticipated revenue and costs associated with each product. This type of budget helps to answer questions such as:
- Is the profit margin on each product line satisfactory?
- Is production capacity sufficient to support the sales organisation?
- What can we afford to spend on research?
- Are adequate funds available?
If we get negative answers to any of these questions, the plan needs revising.
ii.The responsibility budget
This sets out budget information by responsibility areas. It is thus a control device — a statement of standard performance against which actual performance can be compared.
The costs in a responsibility cenfre will vary with volume. The responsibility budget shows the expected costs at various volume levels. Also, there will be responsibility budgets for a variety of other special purposes.