Question

A budget is a detailed sequential outline for using limited resources. It seeks to: plan the way to achieve long-term goals through short-term actions, communicate the decisions for short-term actions in one shared document, coordinate activities among different departments within the firm, measure achievement of the short-term goals, and so control departments, product lines, and employees. What is the first type of budget an organization prepares—operating or financial—and why? What are the two basic steps (the first two, in fact) of developing this budget and how do they lead to the preparation of the budgeted income statement?

Answer 1

The first type of budget an organization prepares is  Operating Budgets

An operating budget is a detailed statement showing all the operational expenses and incomes expected during a particular period of time. Therefore, an operating budget reveals how much profit an organization will generate given the assumption of revenues and expenses proves right in the future.

The operating budget is prepared before the financial budget since many of the financing activities aren't known until the operating budget is prepared. It establish financial accountability instead of spending haphazardly and losing sight of goals. operating budget so it more closely aligns with the actual needs of your business.

Steps for Creating an operating budget

Step 1: Make a sales budget

The first step in creating operating budget is to make a sales budget. A sales budget is a monthly projection of how many products and services will sell and how much revenue will earn. Projecting sales for each month allows to plan for seasonal changes in income and adjust spending accordingly.Before project your sales, list all the products or services business sells and their prices. It need not to account for every variation of your products, like size or colors, but do need an accurate list of the products and services with their price points.

There’s no way to be 100% sure they’ll pan out the way predicted. But it can improve their potential accuracy by looking at the past financial data and using that information as a starting point.With the old financial statements in hand, for each product and service project how many units That  plan to sell each month. If the work on an hourly rate, one hour equals one unit.

Step 2: Budget your costs

The next step is to budget your costs. costs are the direct expenses related to selling products or services. Direct costs, also known as costs of goods sold, are Cost of the materials you use to produce your product, Cost of labor, or the work that you outsource that goes into producing a product, Cost of labor to provide a service and Cost of merchandise you resellIn other words, these are necessary costs that must pay to sell the product or service. Operating, or overhead expenses, are not included in the costs. These costs aren’t directly related to offerings but do keep the business functioning, like keeping the lights on in the workshop.

if Budgeted cost increases the profit in Financila statement Decreases and Vise versa