How to Prepare a Budgeted Income
A budgeted income statement is an approximation of what a business will make in a certain period of time. It is not always accurate, since various factors affect the budgeted income. The purpose is to provide the groundwork for other types of budgets. For example, when an organization plans its fiscal budget, one of the elements used is the estimated budgeted income. In manufacturing, the budgeted income is determined by adding the cost per unit of an item with the cost of the labor involved in creating the item, as well as a manufacturing overhead rate.
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Instructions
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Estimate how many items will be sold and multiply by the selling price of the item. For example, if a company manufactures bowling balls, and sales projections indicate 3,000 bowling balls will be sold next year at $30 a bowling ball, the sales revenue will be $90,000. This is sales revenue.
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Compute the cost of the items sold. In the case of bowling balls, it might cost $15 to manufacture one bowling ball. This figure includes materials and labor. So, using the earlier example, the cost of the bowling balls is $45,000.
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Subtract the cost of the items sold from the sales revenue to determine the gross profit. In the example, the gross profit for the bowling balls is $45,000.
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Determine operating costs. Operating costs are the costs not connected with materials and labor. They can can include equipment depreciation, as well as rent on a manufacturing facility. They can also include any miscellaneous expenses. In the example, the operating costs for the bowling balls comes out to $17,000.
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Subtract the operating costs from the gross profit. This determines the net income, which is the final outcome in the budgeted income statement. In the example, subtract the operating costs ($17,000) from the gross profit ($45,000) to get a remaining figure of $28,000. This means the net income from the entire process, once all costs factor in, is $28,000.
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Tips & Warnings
By using the budgeted income statement, a company has a foundation to find ways to improve profits by examining various elements in the statement. For example, if a company finds a way to manufacture bowling balls for less than it is currently doing, the company can increase its net income. One way to do that is to use cheaper materials to bring the manufacturing costs down. Another way to reduce costs to increase net income is to pay the workers lower wages.
