Lesson 1, Topic 1
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The budgeted Income Statement


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A budgeted income statement is a financial report that compares the budgeted revenue and expense figures with the actual performance numbers achieved during the period. In other words, it’s a report that lists the predicted numbers side-by-side with the actual numbers to show the company performance compared with the expected performance.

Budgeted Income Statement Mean

Management uses the budgeted income statement to track how well both departments and the company as a whole is performing during a period. At the beginning of each period, management typically sets budget and performance goals that they expect the company to meet. These goals are based on performance in prior periods as well as management’s growth expectations.

Since these budgeted numbers are based on predictions and expectations, they are rarely accurate. Departments rarely hit their estimated performance numbers exactly. It’s more often that they exceed or fall short of these goals. The budgeted income statement keeps track of the variances or differences between the actual and budgeted numbers.

Roll of Budgeted Income Statement

Planning Purpose

The budgeted income statement is an important part of a business’s financial planning process. The budgeted income statement, along with a budgeted balance sheet, can help a business determine if its plans are financially feasible. A business can develop and compare different budget projections to help in making decisions about which projects the business should pursue and how it can pay for them.

Purpose

After the fact, a business can compare the budgeted and actual income statements to analyze the performance of the business, determine if the business is on its desired course and decide if changes need to be made. This comparison also helps in preparing budgeted income statements for upcoming periods.

Other Uses

Lenders and potential investors often want to see a budgeted income statement as part of the projected financial statements used in making lending and investment decisions. For this reason, all the assumptions underlying a budgeted income statement must be reasonable and meet professional accounting standards.

Preparing the Statement

Preparing the budgeted income statement comes after preparing other parts of the budget, including for sales, purchases, production and administrative expenses. In a company with more than one department, each department will need to provide financial data that goes into the company’s budgeted financial statements. A projected income statement contains the same items as an actual income statement, including income, cost of goods sold, gross profit, operating expenses, depreciation, net income before taxes, taxes, and net income after taxes.

Example

Unfavourable variances occur when the actual numbers are worse than the budgeted ones. For example, lower than expected revenues is an unfavourable variance.

A favourable variance, on the other hand, happens when the actual numbers are more profitable than the budgeted numbers. If actual costs for the period were lower than budgeted costs, the company would be more profitable than expected. Thus, a favourable variance would occur.

The budgeted income statement places a U next to each unfavourable variance and an F next to each favourable variance. This way managers can easily identify the performance areas that need the most improvement.

The basic format of a budgeted income statement looks like a comparative income statement. The budgeted number are in one column followed by the actual numbers followed by the variance calculation.

SELF-CHECK ACTIVITY

  1. What does mean of budgeted statement?
  2. What are the major roll of budgeted statement?