Cost Accounting: Budgeting Basics
In cost accounting, a budget is a financial plan that includes both financial and non-financial information. Its most obvious features are a projection of revenue (how much you anticipate selling) and expenses (how much you anticipate spending). The budget can also contain non-financial information, such as how many employees you think you need.
A budget is a forecasting document, but businesses use it as a financial control tool, as well. A financial control is a tool to monitor activities in your business. One control is to review spending and ensure that you don’t exceed your budgeted spending. Often, a company (or a division or department within it) isn’t allowed to spend more than has been budgeted.
Budgets cover a specific period of time, most commonly a year. And a budget looks into the future. Although you use historical information to put together your budget, the activities you plan happen in the future.
When you budget, you’re in good company. Businesses and governments, both large and small, create budgets. So do millions of people.
A master budget is a summary of your financial plan and your operating plan. The master budget gives you a big picture and sets your course of action for an upcoming period. It’s critically important.
The financial plan is what you share with outside parties who need your budgeted information. The bank where you have a loan may want to see your financial budget. In some cases, a government regulatory agency may want to review your budget.
If you manufacture food, the Food and Drug Administration (FDA) might want to review your budget. Financial information comes from three financial statements: budgeted balance sheet, budgeted income statement, and budgeted statement of cash flows.
The operating plan is used internally. Your managers need to understand how much they can spend this year and how they are allowed to spend it. Managers also need to understand how much money the company is forecasting as a profit. The projected profit affects the manager’s sales plans. These details are contained in the operating plan. You hand out the operating plan to each manager, and the managers implement the plan.
The master budget is a comprehensive picture of your plans for the future and how the plans will be accomplished.
Operating plans can contain non-financial information. Decisions about production, hiring, and selling effort are components of operating plans.