10.1 Types of Budgets

In most businesses, the most important, over-arching budget for the entire organization is known as the master budget, and represents a comprehensive financial plan for the entire organization.

The master budget is typically composed of two distinct parts: the operating budget and the financial budget. These in turn can be composed of other, smaller budgets representing specific parts of the businesses costs and revenues.

Operating Budgets, Financial Budgets, and the Relationship between Budgets.

Operating Budget

  • Sales Budget Cash Budget
  • Production Budget Budgeted Balance Sheet
  • Direct Materials & Purchases Budget Capital Expenditures Budget
  • Direct Labour Budget
  • Overhead Budget
  • Selling and Administrative Expenses Budget
  • Ending Finished Goods Inventory Budget

Financial Budget

  • Cash Budget
  • Budgeted Balance Sheet
  • Capital Expenditures Sheet

The operating budget shows the incoming-generating activities of an organization . This includes all costs and revenues associated with sales, production, inventory, overhead, etc. Businesses will usually prepare the operating budget for their business prior to the financial budget, since elements of the financial budget will be affected by the operating budget.

The financial budget shows an overall financial position by detailing the inflow and outflow of cash from a company. The elements of this budget are not directly tied to the income-generation of the company, and include any expected borrowing or investments, and managing the company’s assets.

In the diagram below, we depict a flowchart of the financial planning process that you can use as an overview of the elements in a master budget. Thus, the starting point in preparing a master budget is the operating budget. Since the planned operating budget shows the net effect of many interrelated activities, management must prepare the supporting budgets, such as sales, production, and purchases, in a logical order before preparing the planned operating budget.

Flowchart of financial planning process: sales budget, projected cost of goods, selling and admin budget, other expenses and taxes, projected income statement, projected balance sheet

1.6 Budget Types” from Engineering Economics by Schmid, B., Vanderby, S. is licensed under a Creative Commons Attribution 4.0 International License, except where otherwise noted.

Introduction to Operating Budgets” from Managerial Accounting by Lumen Learning is licensed under a Creative Commons Attribution 4.0 International License, except where otherwise noted.


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