The operating budget is the yearly or annual budget of an activity mentioned in terms of cost accounts, Budget Classification Code and sub-functional and functional categories. It includes estimates of the total value of the productive inputs (resources) needed for the performance of the operation such as reimbursable services or work for others. It also consists of estimates of the workload in terms of the total work units recognized by the cost accounts. Generally operating budgets are constructed for a year, by months. Some of the companies or individuals construct five year operating budgets with different reporting period. In the US, business organizations along with the local and state governments divide their budgets into two kinds such as capital budget and operating budget. The operating budget is generally utilized to a keep track of salaries, interest payments and maintenance operations.
The operating budget sets forth the first year slice of the long-range plan in terms of the responsibility centers obligated for implementing the plan. The long-range plan is structured in terms of programs, whereas a given responsibility center’s activities cut across a number of programs. As a statement of the performance expected for each responsibility center manager, the operating budget is an excellent control device because comparing it with actual performance can provide a basis for assessment. Each manager is responsible for preparing those parts of the operating budget that correspond to his or her sphere of responsibility.
Responsibility budgets are broken down into cost elements-for example, labor, materials, supplies, maintenance, supervision and utilities. Such a breakdown is useful both as a guide to spending and as a basis for identifying the areas of inadequate performance if actual spending differs from the budgeted amounts.