Preparing an Operating Budget—Cost of Goods Sold, SG&A, and Operating Income

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Calculating expected operating income

Finally, the budgeted income statement can be calculated. The difference between expected sales and expected costs is the expected operating income.


Operating Income: Year 2 Budget

  

Actual

Year 1

Year 2 Budget

Rate of Change

Operating income:

Total revenue

$939,000

$1,241,800

32.2%

Cost of goods sold

$310,080

$382,700

23.4%

SG&A

$361,200

$440,600

22.0%

Total costs

$92,000

$94,500

22.6%

Total Operating Income

$671,280

$823,300

56.3%

Typically, it will be necessary to rework the first draft of an operating budget in order to bring the budgeted results into line with goals and constraints. Testing different scenarios is the "what if" iterative process of budgeting. How will a change in one area affect the expected outcome? What if we increase advertising? How much would that increase sales? What if employees decide to go on strike? How can we incorporate that risk into the budget?

In the sample budget summarized under Operating Income, contract service sales resulted in a significant jump in anticipated sales revenues in Year 2. However, sales salaries and direct labor costs rose in proportion—the projected growth in operating income is largely due to the assumption that overhead and direct materials costs would not be affected by the increase in contract sales.

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