Learning Outcomes
- Create a budgeted income statement
“How much money will we make this year, if we meet all of our budgets?” asked your supervisor. Well, we still don’t have that number, even with all of the work we have done so far to create budgets for each area of our company. We do know that cash flow looks good, and it feels like we have our pricing and production in a good place. So you tell your supervisor, “Let me finish up a couple of things here, and I will get you that information. It looks like we are in for a good year though!” As your supervisor walks out of your office, you begin to compile all of the details needed to complete a budgeted income statement.
Ok, wow, we have all the information we need to see what our income statement will look like if how we have budgeted our income and expenses happens. This is kind of like the frosting on the cake! Seeing it all put together, and finding out if we have done a good job of costing our products.
So what numbers are we going to need off our other budgets?
| Hupana Running Company Budgeted Income Statement | |
|---|---|
| Sales | $200,000 |
| Cost of goods sold | $52,000 |
| Gross margin | $148,000 |
| Selling and administrative expenses | $41,000 |
| Net operating income | $107,000 |
| Interest expense | $ – |
| Net income | $107,000 |
*Cost of goods sold = 2000 pairs at $26 per pair (assuming same costs on the 100 beginning balance in inventory as this year’s production costs
Did you print the budgets yet? If you did, let’s go back through and see where all of our numbers are coming from!
- Sales: Sales Budget
- Cost of Goods Sold: The beginning inventory of 100 pair (assuming a cost per pair of $26 each), plus 1900 produced this year at a cost of $26 per pair from our finished goods inventory budget unit production cost. So 2000 × $26 = $52,000
The gross margin is simply the difference between our sales and our cost of goods sold.
The selling and administrative expenses come off the budget of the same name. We subtract those from our gross margin to come to a net operating income.
If we would have needed to borrow money, we may have had interest expenses! We had an awesome year at Hupana Running Company, so no loans needed!
Think about how this income statement might look different, if competition stepped in and we had to drop the cost of our shoes to $60 per pair?
Practice Questions
