Operating income is earnings before interest and taxes.  This is simply what your investment or business brings in, the revenue, minus the costs of the operation, the operating expenses.  This, however, is not income, because you will not realize the amount that is operating income.

The equation for finding operating income is:

Operating Income = Revenue - Operating Expenses

In this form of budgeting each expense must be justified for each new business period. So, budgeting starts at a “zero base” and every expense is looked at for its benefits and costs. The budgets are then formed based on what is needed for the coming business period, not dependent upon if the budget is higher or lower than the last period’s budget.

ZBB can decrease expenses by evaluating what is needed and what is not. However, it is much more time consuming than Cost-Based Budgeting, where only items where expenses increase are looked at.

The accounting that most of us are familiar with is financial accounting, what we see when we look at a company’s balance sheets. However, managerial accounting isn’t set in place to be scrutinized by the public and other outside inquirers, but for the managers of the company to be able to make better decisions on how to run their business. Therefore managerial accounting is largely done internally and is not based on General Accepted Accounting Principles (GAAP).

There are three objectives in managerial accounting:

1. To provide information for costing out services, products, and other objects of interest to management.
2. To provide information for planning to do something, controlling growth, evaluation, and continuous improvement (better, faster, cheaper, greater). As far as improvement goes it is important to remember that quality is based on what the customer perceives as value.
3. To provide information for decision making.

Variable cost is a cost that increases in total as output increases and decreases in total as output decreases.

For example, if you are producing necklaces and each necklace that you make costs you an additional $10, this is your variable cost. So your cost for producing X amount of necklaces would be $10X. This is assuming that there are no fixed or other such costs.

Variable costs will typically be compromised of your materials and labor needed to make an additional product. There are of course other factors that can be associated with variable cost such as extra utility usage (on a pay per use rate) or something of that nature.