Which items are included in the operating budget?

• A. Operating expenses and major improvement expenses, but not the replacement fund.
• B. Replacement fund and debt service only.
• C. Capital expenditures and debt service only.
• D. All expenses including the replacement fund.

Answer: (A)

Budgeting distinguishes operating costs from reserves and financing. The operating budget covers the day-to-day costs needed to run the organization during the period, including operating expenses such as salaries, utilities, routine maintenance, and other costs required to keep operations going. It may include major improvement expenses if they are part of ongoing operations and funded from operating funds, but it does not include money set aside for future major replacements.

The replacement fund is a reserve meant for future capital replacements and is kept separate from the operating budget. It belongs in a reserve or capital budgeting plan, not in the operating budget, because it supports long-term asset replacement rather than current operations. Capital expenditures and debt service also fall outside the operating budget, as they relate to long-term investments and financing.

So, the items that belong in the operating budget are operating expenses and major improvement expenses, while the replacement fund is not included.