Types of budgets
The combination of various factors within the the company to present a complete picture of its financial activity
Master budget
This budget remains unaltered regardless of changing circumstances.
static budgets
These two accounts are key factors utilized in a cash budget.
accounts payable and accounts receivable
If current labor costs are $300,000 and an expected increase is 5%, this would be the projected labor cost.
$315,000
This overhead category includes costs related to developing new products or improving existing ones.
Research overhead
All expenses must be justified for each new period.
Zero-based budget
This budget is prepared using a previous period's budget with incremental amounts added for the new period.
Incremental budgets
This type of cost includes direct costs of producing a product and cannot be avoided.
operating costs
In a budget projection with food costs of $500,000 and a 3% increase, this would be the new food cost.
$515,000
These costs can be reviewed to help bring down the "bottom line" of a business.
overhead costs
A forecast and analysis of projected income and expenses over a specified amount of time, usually one year.
operating budget
This is an advantage of incremental budgeting where managers can operate departments consistently.
stability
These costs include fixed and semi-variable expenses like rent, insurance, and utilities.
overhead costs
This is the formula used to calculate a projected budget item with an expected percentage increase.
What is current cost + (current cost × percentage increase)
This is a key difference between operating costs and overhead costs in relation to profit.
operating costs are directly linked to profit generation while overhead costs are not
focuses on forecasting expenses and estimating incoming cash revenue, which account for cash on hand, incoming sales, and credit collections.
cash budget
This is a disadvantage of incremental budgeting that assumes activities continue without change.
resistance to innovation
This type of cost is directly connected to a specific object, product, service, or project.
direct costs
If operational costs are $50,000 with a projected 7% increase, this would be the new operational cost.
$53,500
These are examples of indirect costs that represent the "real cost" of business.
utilities, rent, cleaning, supplies, and insurance
Determines if a company has enough capital for long-term investments like equipment or building expansions.
Capital budget
This negative behavior is encouraged in incremental budgeting to ensure the next period's budget remains the same.
spending up to the budget limit.
These costs are not directly connected to producing a cost object but are necessary for day-to-day operations
Indirect costs
In the example given, this is the total projected budget after calculating all increases.
Current year
Total revenue: 1,000,000
Labor cost: 300,000
Food cost: 500,000
Operational cost: 50,000
Expected increase:
Labor cost: 5%
Food cost: 3%
Operational cost: 7%
$883,500
These employee benefits are considered indirect costs in a budget.
Fringe benefits: PTO, retirement matching, health insurance