Question

For this week’s reflection, please describe the components of an operating budget and how the different components contribute to the overall budget.

Answer 1

Operating budget is estimation of revenue  & expenses of company .Components of operating budget

• Sale budget
• Production Budget
• Material purchase budget
• Labour budget
• Overhead budget
• Ending inventory of finished goods
• cost of goods sold budget

How components contribute operating budget

Sale budget This budget is prepared to determine number of units sold.All other budgets depend on this. It is first step to prepare overall budget.

Production budget It is used to determine number of finished goods   to be produced.

Number of finished goods produced = Sale +closing inventory-beginning inventory

Material purchase Budget Number of units of raw material required to produce finished goods* cost of direct material per unit.It helps to determine cost of direct material.

Labour budget Budgeted hours for direct labour determined by relationship between output and labour hour.

Total number of hours* cost per labour hour.

Overhead budget Cost except direct material and direct labour is included in overhead expenditure.Cost which is varying with respect to labour hours is known as variable cost and which do not  change is fixed cost.

Ending Inventory of finished goods This budget is prepared to calculate cost of per unit product.It is used to calculate cost of goods sold for income statement

Cost of goods sold budget This budget is prepared if there is beginning and ending inventory of goods.It is used to determine calculate cost of goods that have been sold.