The operating budget should be structured based on the way the business operates. Revenues and expenses should be budgeted at the same level of detail as they will be recorded for actual operations. This provides you with a tool for managing your business. A sufficiently detailed budget will enable you to compare actual results with budgeted amounts and perform quantity and price variance analysis.
Product recipes for budgeting cost of sales
If your business involves selling a product, you may start by determining what it will take to make the product, in terms of materials and supplies, labor, and overhead. If you can prepare a "recipe" for a product, and identify the ingredients, you can do some calculations based on quanitities and prices to figure how much it will cost to make each unit of product. The ingredients include direct costs of raw materials, supplies, and labor.
If you want to determine an "all-in" cost, you will need to add in the indirect costs or overhead expenses, such as indirect labor (administrative and management, for example), utilities, maintenance, depreciation, insurance, and any other general expenses. Based on availability of time and materials, and your production capacity, you can determine how many units you are able to produce each month. If you know what your average monthly overhead expenses are, you can allocate the overhead over the number of units to determine how much should be added to the cost of each unit. If you are making more than one product, you may want to assign a weighting factor in allocating overhead expenses. For example, products with a higher direct cost would absorb more of the indirect costs.