How An Administrative Budget Works

Administrative budgets are detailed financial plans that businesses create for an upcoming period. Businesses will usually have an office manager prepare them quarterly or annually. Costs identified in an administrative budget are anything associated with running the business, excluding production costs or costs associated with providing a service. It will include fixed and variable costs.

Administrative budgets are for future spending needs, and you shouldn't prepare them using past budgets or actual results. It includes selling, general, and administrative (SGA) expenses that can be planned and predicted. The officer manager can also estimate depreciation for the period covered by the budget.

Depending on the business or organization, the administrative budget will vary in content and structure. Large organizations with many sub-sections or services will have a widely distributed budget compared to smaller organizations or niche entities.

Administrative Budget Examples

An administrative budget will incorporate a businesses' non-production costs. Examples include:

  • Marketing costs
  • Human resources
  • Payroll for non-manufacturing departments
  • Rent
  • Insurance
  • Sales department costs
  • Dues and fees
  • Legal fees
  • Consulting costs
  • Depreciation
  • Amortization

Payroll that you can identify in an administrative budget includes manager and supervisor pay. Other payroll examples include:

  • Sales staff
  • Accounting personnel
  • Clerical staff
  • Any support staff outside production

An administrative budget won't include some non-selling expenses with too many variables to plan for or use for predictions. Examples include interest and income taxes. Businesses can't calculate interest without a debt estimate. Since the administrative budget is usually prepared before capital expenditure and cash budgets, the company debt is unknown.

Significance Of An Administrative Budget

An administrative budget allows businesses' to manage the administrative side of operating their business. It allows management to control the day-to-day activities required to keep a business running. Additionally, an administrative budget is essential for businesses to make future budget estimations and measure progress, financial performance, and managerial effectiveness.

You can analyze an administrative budget to see trends or patterns. For example, you can compare the planned administrative budget with actual results to identify what is working and what isn't. This analysis allows managers to decide where to allocate their resources effectively.

History Of The Administrative Budget

The word budget comes from the word bougette, Old French for "small leather purse." In the United States, the Bureau of the Budget was established in 1921 after President Harding signed the Budget and Accounting Act. Today the bureau is known as the Office of Management and Budget.

Before the 1921 Act and through World War I, the U.S. government didn't have a systematic budget process. There was a need to manage the budget process better when the Federal budget grew after World War I. The established Budget Office was responsible for developing an annual budget and overseeing the allocation of funds. The 1921 Act also established the Government Accounting Office (GAO) to evaluate the budget and ensure the Budget Office distributed funds properly.

Administrative Budget vs Production Budget

A business can prepare both the administrative and production budget quarterly, annually, or for any period they choose. The administrative budget is usually larger than the production budget since you can break it down into separate budgets, including sales and marketing costs.

The production budget is specific to manufacturing costs and costs for providing a service. It is usually prepared in terms of units manufactured. It can be further detailed to include:

  • Unit cost
  • Cost of depreciation
  • Cost of labor
  • Cost of materials