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Creating a budget is a critical part of running a business. You will have a master budget that includes the operating budget and the financial budget. Your operating budget is your prediction of the income and expenses you will have during a specific period of time. You can predict by month, quarter, or year, and it will be detailed and show you what it costs to operate your business. When you develop your operating budget, you should consider the following costs.

Sales Budget

This budget will cover what you expect the sales to be over the time period you specify. You can consult with sales people and consult your past performance to come up with this number. You should also consider the economy, your pricing policies, advertising, competition, and more. You will include what you sold as well as how much money you take in. 

Production Budget

Your production budget tells you how many products you need. This budget is given in terms of unit numbers, and you figure out how many units you have to begin with, how many you expect to sell, and how many you want to have remaining at the end of the time period. To determine the cost, you take the cost of one unit, and multiply it by the number you need.

Purchase of Materials

This part of the operating budget includes any raw materials you need to purchase. You state how much of each one is needed and the cost. This will be based on your production numbers. You need to calculate the number of raw materials used in each unit, and then multiply it by the cost. 

Labor Costs

You need to consider the cost of producing your products as well. The labor will go into this section of the budget. You need to break it down to the hourly rate for labor and consider how long it takes to produce one unit of product. Multiply it out to get your labor costs. 


Your overhead includes any other costs that aren’t included in the raw materials and labor. This might be your rent, utilities, or other costs. You need to include it to get the full cost of producing your products. 

Selling and Administrative Expenses

This is your budget outside of producing the items you sell. It can include sales commissions, utilities, and other expenses that have not yet been accounted for. 

Finished Products Budget

Here, you will take your total cost for producing an item and add it up to get the cost for one unit of finished product. This way, you can multiply the cost by the number of products in your inventory to find out what your inventory is worth.