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For a manufacturing company, cost of goods sold is computed similarly, but in place of purchases
we have the cost of the raw materials of the goods manufactured, together with the labor and overhead
incurred in the manufacturing process. Beginning and ending inventories consist of raw materials,
work in process, and finished goods.
Administrative Expense Budget (7-10)
The expected administrative costs for an organization are presented in the administrative expense
budget. The administrative expense budget may contain many fixed costs, some of which may be
avoidable if subsequent operations indicate that some cost cuts are necessary. These avoidable costs,
sometimes called discretionary fixed costs, include such items as research and development, employee
education and training programs, and portions of the personnel budget. Fixed costs that cannot be
avoided during the period are called committed fixed costs. Mortgage payments, bond interest
payments, and property taxes are classified as committed costs. Variable administrative costs may
include some personnel costs, a portion of the utility costs, computer service bureau costs, and
supplies costs.
For C&G‟s Gift Shop, selling expenses are budgeted at 15% of sales. These are variable costs since
they change in proportion to the change in sales. You might think of these as commissions paid to the
sales personnel as a percent of the sales made during the period. The fixed portion of administration
expense is budgeted at $23,000 per month. These expenses might be rent, salaries of administrative
personnel, and so forth. The administrative expense also contains a variable component, budgeted at
10% of sales. Finally, depreciation is computed on a straight-line basis over 15 years and is a fixed
expense, budgeted at $3,472 per month.
Budgeted Income Statement (3-18)
The budgeted income statement shows the expected revenues and expenses from operations during the
budget period. Budgeted income is a key figure in the firm‟s profit plan and reflects a majority of the
firm‟s commitment of talent, time, and resources for the period.
A firm may have budgeted non-operating items such as interest on investments or gains or losses on
the sale of fixed assets. Usually they are relatively small, although in large firms the dollar amounts
can be sizable. If non-operating items are expected, they should be included in the firm‟s budgeted
income statement. Income taxes are levied on actual, not budgeted, net income, but the budget plan
should include expected taxes; therefore, the last figure in the budgeted income statement is budgeted
after-tax net income.
Non-operating items in C&G‟s income statement include interest income and interest expense.
Amounts borrowed carry an interest rate of 12% (1% per month), and cash in excess of the $25,000
required for daily transactions is invested in marketable securities earning an investment return of 6%
per annum (0.5% per month). Finally, taxes are levied at the rate of 35% on pretax income.