Budget Types in Management Accounting

Management accounting deals with the internal functions of recording and reporting financial transactions from business operations. While these tasks represent the bulk of management accounting, another important function is the planning and budgeting process for the entire company. Budgets are the financial roadmaps managers use to determine how much money they should spend to generate certain levels of sales and income. Accountants use historical financial information from previous budgets to create current year budgets, adjusting for changes in business operations or the economic marketplace.

The first budget, and most important, is the master budget. The master budget is a company-wide blueprint that lists detailed financial plans for every department in the company. Several sub-budgets exist in the master budget, including separate budgets for operations, external financing, capital improvements and support services. Each budget contains information relating to specific financial goals for the company; after the individual budgets are prepared, accountants roll up this information into one large master budget for executive review. Because master budgets are a detailed and lengthy accounting process, they are completed on an annual basis. This schedule also allows time to prepare for the budget process throughout the year, noting changes in budget amounts or additional items that should be included in the following year’s budget.

The operating budget is an important sub-budget because it represents all the information relating to sales and income for the coming fiscal period. Most operating budgets are created on an annual basis, although the main operating budget may include several monthly budgets for use throughout the year. The operating budget includes information on sales forecasts, manufacturing costs, inventory and operating expenses. These categories make up the necessary financial outlays needed to generate sales for the business. Operating budgets may be created for several different locations or product lines, depending on the size of the company.

Flexible budgets are an important budget used by manufacturing and service companies to measure the production costs of goods and services. This budget is an active part of daily operations as it tracks the cost variances from the production process. Accountants measure the actual costs spent on materials, labor and overhead against the budgeted expense amount to determine why and how the variances occurred. Variances are determined as favorable or unfavorable, depending on the amount of extra money spent or saved during the process. Flexible budgets allow accountants to inform managers about significant variances in the production process, giving managers time to change or correct their operations for cost overrun problems.