An Operating Budget can be prepared in two ways- programme budget and Responsibility budget.
(a) Programme Budget :
The programme budget describes the major programmes the company plans to undertake in future. Such a budget may be prepared either by product lines or by products showing the anticipated revenue and costs associated with each product.
This type of budget is useful to an executive examining the over-all balance among the various programmes of the business. It helps to answer such question as-
- Is the profit margin on each product satisfactory ?
- Is production capacity in balance with the size and capacity of-the sales organization ?
- Can we afford to spend so much for research ?
- Are adequate funds available ?
A negative answer to any of these questions indicates the necessity for revising the plan.
(b) Responsibility Budget:
The responsibility budget is another part of an operating budget. It sets forth plans in terms of the persons responsible for carrying them out It is a statement of expected performance against which actual performance can later be compared. There may be a responsibility budget for each department showing the costs that are controllable be the head of the department.
For example, sales budget can be prepared for sales department showing the budgeted revenue, sales administration expenses, etc. They may be a programme budget showing costs for each product including both direct cost and allocated costs. The figures on both sets budgets add up to total costs.
Thus, we see that programme budget and responsibility budget both are two ways of presenting the over-all operating plan for the business. They both are complementary to each other and both arrive at the same figure for projected net income and return on investment.
The only difference between the two is that a responsibility budget fixes a fixed responsibility upon the head of the department. Thus, it is, therefore, primarily a control device. A programme budget is not more useful for control purposes as the costs shown on it cannot ordinarily be related to the responsibility of specific individuals.
