Learning Outcomes
- Prepare a budgeted income statement
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:
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):
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):
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.