Budgeted Income Statement

Learning Outcomes

  • Prepare a budgeted income statement

A flowchart titled “Types of Budgets”. The budgeted income statement is highlighted in yellow. At the top is the sales budget. The sales budget has two arrows pointing to the production budget and the SG&A budget. The production budget has three arrows pointing to the materials budget, labor budget, and manufacturing overhead budget. Those three budgets are all pointing to the cost of goods sold budget. The sales, production, materials, labor, manufacturing overhead, cost of goods sold, and SG&A budget boxes are all blue and there is a bracket labeling those as the operating budget. Below the operating budget is a horizontal line showing the capital expenditures budget in red on the left, and going to the right from there, an arrow pointing to the cash budget, with another arrow pointing to the budgeted income statement, and a final arrow pointing to the budgeted balance sheet. The cash budget, budgeted income statement, and budgeted balance sheet are all green and there is a bracket labeling those as the financial budget. There are also arrows pointing from the cost of goods sold budget and the SG&A budget to the cash budget.
In order to prepare a standard multi-step income statement, you will use the information from the sales budget, cost of goods sold budget, and selling and administrative expense budget. These budgets could be prepared on a monthly, quarterly, or annual basis, but since this is the highest level of budgeting, we’ll summarize for the year. It is likely that this version of the budget would be presented to the board of directors or other leaders, or to lenders and bond underwriters to show forecasted results of proposed future operations. Management is more likely to use the operating budgets to guide day-to-day decisions.

The budgeted income statement for GelSoft would look like this:

Budgeted Income Statement
Description Total
Sales Revenue $  5,861,770
Cost of Goods Sold 3,801,264
Gross Profit Single Line2,060,506
Selling, General, and Administrative Costs 1,850,000
Net income before taxes Single Line210,506
Provision for income taxes @ 30% 63,152
Net income Single Line$    147,354Double line


This pro forma income statement is based on the sales budget that projected volume to increase by 5% each quarter, reflecting higher demand due to increased marketing and a selling price for each seat set at $34, which is not scheduled to be increased during the budget period (year):

GelSoft Sales Budget
Description Q1 Q2 Q3 Q4 Year
Sales in Units 40,000 42,000 44,100 46,305 172,405
Budgeted Price $34 $34 $34 $34
Sales in Dollars Single Line$1,360,000Double line Single Line$1,428,000Double line Single Line$1,499,400Double line Single Line$1,574,370Double line Single Line$5,861,770Double line


The cost of goods sold was calculated as follows from the production budget, the direct materials budget, the direct labor budget, and the manufacturing overhead budget:

Description Units Cost/Unit Total Costs
Beginning inventory 30,000 $    20.00 $  600,000
Goods produced during the period 158,605 $    22.48 3,565,440
Goods available for sale Single Line188,605 Single Line4,165,440
Less ending inventory 16,200 $    22.48 364,176
Cost of goods sold (FIFO) Single Line172,405Double line Single Line$3,801,264Double line


Remember that FIFO in this case means we are assuming the units in beginning inventory were sold first. Companies may choose from a variety of cost flow assumptions, which would make the calculations different, but we won’t delve into that here.

Sales minus cost of goods sold equals gross profit, which then goes to pay selling, general, and administrative costs (costs not associated with making the product):

Selling, General, and Administrative Budget
Description Total
Sales Salaries $      450,000
General and Administrative Salaries 950,000
Payroll Taxes and Benefits 120,000
Depreciation on Office Equipment 100,000
Rent and Property Taxes 150,000
Office Repairs and Maintenance 50,000
Miscellaneous Expenses 30,000
Total Selling, General, and Administrative Expenses Single Line$    1,850,000Double line


The subtotal of gross profit less SG&A is called operating income.

Any financing costs (interest expense), gains and losses on sale of equipment, and other non-operating expenses would be subtracted from operating income to get net income before the provision for income tax expense, which we are estimating here at 30%.

The bottom line for GelSoft for this particular budget year is that the company expects to make $147,354 after taxes.

Here is a video demonstrating how to compile a budgeted income statement from the operating budget:

You can view the transcript for “Master Budget: Budgeted Income Statement” here (opens in new window).

Now, check your understanding of the budgeted income statement.

Practice Question