What Is the Use of a Selling & Administrative Expense Budget?
- A primary use for the selling and administrative expense budget is to plan costs for a period of time. Most budgets last for 12 months. Planning costs help companies ensure they have enough funds to pay for operations. This is especially important, as selling and administrative costs are typically the direct result of ancillary services. Revenues cannot offset these costs, meaning that operational profits must help pay these expenses.
- Companies can use a budget to help control managers. Managers will often have a certain dollar amount to spend for each necessary expense to run operations. Creating spending limits through budgets helps to ensure one individual cannot over-commit a company's capital resources. One manager can quickly become out of control with his spending; this will increase the company's cost of doing business.
- Selling and administrative expense budgets can help improve a company's profitability. Rather than giving blanket increase for these spending items, a company can seek to reduce its expenses. Lowering selling and administrative expenses helps to increase the company's net income. Profit increases allow a company to reinvest this capital back into the business, increasing production output.
- Variance analysis is another use of selling and administrative budgets. Accountants will compare the budgeted expenses to actual expenses. Each difference will be favorable or unfavorable. Favorable variances indicate the business spent less money than planned. Unfavorable means the company spent more than necessary on certain expenses. Historical variance analysis can help a company determine why it always experiences a difference between actual and budgeted for certain expenses.
