 The operating expenses budget is based on data from the sales budget. We need to know how many units we're going to sell before we know how much our operating expenses will have. You can see that the operating expense budget is the seventh budget completed in the master budget process. A common format is to divide operating expenses into two classifications, variable operating expenses and fixed operating expenses. Recall that variable costs are shown as per unit costs where fixed costs are shown in total dollars. So here we have an example of an operating budget. Although it looks like a lot of items, most businesses would actually have many more items. Let's look at the variable and fix separately so you can see the details a little better. The variable operating expenses are usually listed these expenses as a per unit charge. In this case, we will list the sales units from the sales budget. Then I assume that sales commissions incurred our one dollar per unit and shipping expenses incurred our two dollars per unit. So the rates times the sales units given gives us the total amount of commission and shipping expenses. Bad debt expense can be estimated using the percent of sales method. In my example, I assumed that bad debt expense is one percent of total sales. So the rate times the sales revenue gives us the total amount of bad debt expense. One note to be aware of, a more correct way to do this would be to take the bad debt expense rate times the amount of credit sales revenue rather than total sales revenue. In my example, we haven't broken out cash sales from credit sales yet, but we will. If you encounter a problem that uses net credit sales, then you might not be able to finish this budget until you've completed the cash collections budget. Our operating expenses are usually just given amounts since they don't vary with sales volume. I've assumed these numbers and listed them here. Thus, total operating expenses, excuse me, variable operating expenses plus total fixed operating expenses equals our total operating expenses. So now let's look how to do this in Excel. Notice the column letters and the row numbers. We will need to reference this as we build this budget in Excel. Here we have both the sales budget and the operating expenses budget. We start by linking the two budgets together by having the sales volume and the operating expenses budget link to the same sales in the sales budget. And bad debt expense in the operating expenses budget is a formula calculation using the sales revenue sales in the sales budget. Yes, that is a lot of sales. Additionally, sales commission and shipping expense are formulas using given rates times sales volume. Total variable operating expenses, total fixed operating expenses and total operating expenses are formulas as I've shown here. Finally, some of the numbers I've just assumed because I want to keep the examples straightforward.