Student’s Name
Institution Affiliation
Budgeted Income Statement
To: Jeff Towry
From: Donna Tse
Re: Explanation of Format Used in Developing a Budgeted Income Statement
Date: November 11, 2016
Budgeted Income Statement
As one of the most effective tools for estimating a business future expenses and profits, a budget is a core aspect of every organization. A budget is made through a careful analysis of all the organization’s current costs and incomes and estimating their future prices. In order to form a correct budget, the finance officer must identify key performance indicators, various types of costs, the sources of revenue, and the trend in the organization. Key performance indicators are variables that indicate the effectiveness of a business in achieving its objectives.
The purpose of forming a budget is to predict the estimated costs, incomes or losses, and cash flow. In turn, these outcomes have the overall effect of enabling an organization to plan and correctly determine its future course. In addition, a budget enables an organization to track variances in its spending and performance (Kimmel, Weygandt, Kieso, 2012). Finally, it also acts as a performance report that enables individuals to evaluate the performance of a business against established the established benchmarks.
Performance reports show the actual performance of an organization, in terms of its various departments against the set targets. For example, if the performance target was an increase by 30%, the management evaluates if indeed this target was achieved. Further, they also establish policies to achieve these targets in future.
When forecasting on the future sales revenue, it is prudent for an individual to analyze how the business has been performing in the past few years. In this case, a pattern of growth may indicate that it is likely that the business will have more revenues in future. In addition, the financial analyst should evaluate the economic situation in a country. An overall economic growth, which can be determined by an increase in the country’s gross domestic product GDP, may indicate an increase in revenue. Simply, an increase in GDP implies that individuals now have more disposable income to utilize in the purchase of goods and services (Brewer, Garrison, & Noreen, 2015). Finally, an organization’s own policies and initiatives are an important factor when determining its revenue. An increase in sales and marketing would be expected to result in more revenue for a company.
Cost of Goods Sold
When forecasting the cost of goods that have been sold, a financial analyst should determine the overall changes in the price of the good and its associated costs. In this case, the officer should check the changes in the price of the good itself over a given period. Further, he/she should also check on the associated changes in costs of transport of the goods to the warehouse or to the customer premises. Finally, he should check on the trend in the processing cost of finished goods (Wild, Shaw, & Chiappetta, 2012). The overall rate of change from these costs is what indicates the change in the overall cost of goods sold.
Operating Expense
When forecasting in the operating expense, individuals should forecast on the probable changes in expenses of each class of cost. Although the forecasted number of units to be sold may be many, some expenses may fail to have a significant change if they are fixed costs or if some expenses are not fully used. Generally, some expenses such as labor do not increase at the same rate as the increase in the number of units produced. What really matters is whether these expenses are fully utilized in the production process. Finally, interest expense is determined by the company’s financial restructuring process (Wild, Shaw, & Chiappetta, 2012). Steps towards been self-sufficient by utilizing own capital may result in a decrease in the overall cost of interest expense. However, policies towards more use of borrowed finance may result in an increase in interest expense, which would also be shown in the forecast.
Kimmel, P., Weygandt, J., & Kieso, D. (2012). Accounting: Tools for business decision making (5th Ed.). Hoboken, NJ: Wiley.
Brewer, P., Garrison, R., & Noreen, E. (2015). Introduction to managerial accounting (7th Ed.). New York, NY: Mc-Graw Hill Publishers.
Wild, F., Shaw, K., & Chiappetta, B. (2012). Fundamental accounting principles (21st Ed.). New York, NY: Mc-Graw Hill Publishers.