Question

Discuss how the income statement budget for a tech company or a game company would be created for a year starting with the sales budget through the SG&A budget. Be sure to:

• Be specific in describing the component line items of each
• Identify the individuals that would be involved in developing the budgets

Answer 1

During the preparation of budgeted income statement, the following budgets are prepared one after the other to reach the budgeted income statement -

1) Sales Budget - This budget is prepared to plan the budgeted sales for coming months or quarters or sometimes, weekly as well.

The main components involved in preparation of this budget is that - Budgeted sales in units for each month or quarter and budgeted selling price for each month or quarter. Usually, the budgeted selling price per unit for each month will be the same but the budgeted sales in units will differ according to the estimations or plans of the management. The budgeted sales units are multiplied with the budgeted selling price per unit to calculate the total budgeted sales revenue.

This budget is usually prepared by the sales department as per the guidelines from the management.

2) Production Budget - This budget is prepared to know how many units required to produce for each month or quarter to meet the expected sales.

The main components involved are budgeted sales in units and the expected desired ending finishing goods and beginning finished goods. The required budgeted production is calculated by adding the desired finished goods in units to budgeted sales in units to know the total units require and from that the beginning finished goods in units is deducted to know the total number of units to be produced is calculated.

This budget is usually prepared by the production department as per the guidelines from the sales management.

In case of Tech Company or Game Company, if they invest only in technology then production budget is not prepared but they also develop gaming materials along with technology then production budget is prepared.

3) Direct Materials Purchase Budget - This budget is prepared to know how many units should be purchased to support the production units.

The main components involved in preparing this budget are production in units multiplies with number of pounds required per unit to know total number of pounds of direct materials required and adding the desired ending raw materials inventory to know the total materials requirements and then deducting the beginning raw materials inventory to know the number of pounds required to purchase and then multiplying this with the cost per pound to know the total cost of purchases.

This budget is prepared by the purchase department as per the guidelines from the production management.

In case of Tech Company or Game Company, if they invest only in technology then direct materials purchase budget is not prepared but they also develop gaming materials along with technology then direct materials purchase budget is prepared.

4) Manufacturing Overhead Budget - This budget is prepared to know the total manufacturing overheads including both variable and fixed overheads.

The main components involved in preparing this budget are the number of production in units and variable cost per unit to know the total variable manufacturing overheads and a fixed amount of manufacturing overheads to know the total manufacturing overheads.

This budget is prepared by the production department as per the guidelines from the management.

In case of Tech Company or Game Company, if they invest only in technology then manufacturing overhead budget is not prepared but they also develop gaming materials along with technology then manufacturing overhead budget is prepared.

5) Selling and Administrative Expenses Budget - This budget includes all the operating expenses of selling and administrative including both variable and fixed expenses. Variable expenses like sales commissions are calculated with a percentage on the total sales and other fixed expenses are like salaries etc. are part of the selling and expenses budget.

This budget is usually prepared by the sales department as per the guidelines from the management.

Based on these budgets, the budgeted income statement is prepared.