An organization’s budget details its financial plan. Companies break down the plan into two budget types: an operating plan and a capital plan. The operating
budget focuses on the day-to-day operations of the company and typically covers a one year period. Managers review the plan throughout the year to monitor any
deviation from anticipated revenues and expenses, as any changes will affect the annual operating profit. Capital budgets focus an organization’s internal
investment strategy and tend to be long-term plans. However, the capital budget may be updated on an annual basis if needed.

Managers develop an operating budget by first budgeting expected operating revenue. The expenses are then considered and must cover costs such as labor, raw
materials, utilities, and overhead. These expenses are monitored on a monthly basis.

Capital budgets are developed for two main reasons: expansion and replacement. Most companies have a minimum dollar amount assigned to capital items to be
included on the budget. Depending on their costs, items such as copiers or printers could be considered capital budget items. An important tool in the capital
budget is the cash flow reporting. Cash flow is reported using one of four methods:

Payback method – recognizes the cash flow necessary to recover the initial cash invested
Accounting rate of return – based on profitability
Net present value – also known as NPV, a discounted cash flow method based on cash flows over the life of the equipment or project
Internal rate of return – also known as IRR, another discounted cash flow method that takes incoming and outgoing cash, as well as profitability and the time
value of money into account
Basic components of a budget are identified as follows:

A statement of the organization’s goals, objectives, and priorities for the next year
A specified time period to which the budget applies
A method of reviewing budget plans and procedures
Budgeted financial statements: An estimated detailed breakdown of income and expenses for a particular time period (e.g. last year’s budget and actuals)
Module 2 Assignment- Input From a Cookie

Baking Cookies – An Operating Budget Example

The cost of a procedure is not the ?charge? of the procedure. For example, if I were making cookies, and I bought all the supplies for $26.00 ? these are my
costs. The expenses for making the cookies would be daily rental supply (fixed expense) for the kitchen ($12) and hourly salary (3 hours at $15 per hour =
$45). This makes the total expenses for the cookies ($26 + $12 + $45=$83)

The Income for the cookies: 20 dozen cookies at $15 per dozen = $300.

Operating expense for the cookies are as follows: $300 income less expenses $83 =$217