Operational Budgeting in Accounting: Key Concepts and Examples

School: Royal Melbourne Institute of Technology - Course: ACCOUNTING ECON1010 - Subject: Accounting

Accounting in Organisations and Society Topic 5: Operational Budgeting What is a budget? A detailed plan of expected activities and resource requirements for a specific time period Examples: • A production cost budget, which estimates the costs of manufacturing a specific amount of product over the next month • An advertising budget, which estimates the costs to be spent on advertising in the next 6 months Note: Budgets can cover different time-periods, depending on the information requirements of the managers for whom the budget is prepared • E.g. A week, month quarter, year Why are budgets important? Budgets influence behaviour Are the behaviours budgets encouraged always in the interests of stakeholders? oManagers tend to focus on achieving desired outcomes, while sometimes ignoring the process of achieving outcomes and the impact these outcomes have on others The Master (Annual) Budget: Sales Budget A sales budget is a detailed summary of the estimatedsales units and sales revenues for a given budget period. • Usually the management accountant communicates with the marketing departmentto forecast sales • Factors to consider when forecasting sales include: • Internal factors: e.g., past sales levels; new products planned • External factors: e.g., general economic trends, specific industry trends

Sales Budget - example William is an accountant for EFG Doors Manufacturing Company. He is preparing a sales budget for the business's most popular product, the Moda door. Expected sales for the Moda, during 2020 are: Quarter 1 - 2,000 units Quarter 2 - 2,200 units Quarter 3 - 2,400 units Quarter 4 - 2,600 units The selling price for each unit is expected to be $500. Prepare the sales budget for the Moda based on the above forecasts •A sales budget can be prepared for one specific product, a product line, or ALL products an organisation produces • A sales budget usually comprises three items of information- 1)Expected Sales in UNITS, 2) Selling Price and 3) Total Sales Revenue