Budgeted income

So far we have looked at a number of subsidiary budgets:

• sales
• production
• materials
• labour
• overheads.

These form the basis of the master budget. In reality a business may have other budgets too, such as expenses, distribution and capital expenditure, although that is beyond the scope of this course.

The master budget is the budget into which all of the subsidiary budgets are drawn together. It is drawn up after all of the functional budgets have been drawn up, checked and approved. It is normally made up of:

• the budgeted statement of profit or loss
• the budgeted statement of financial position
• the cash budget.

We will cover the cash budget next week. The statement of financial position calculates the value of the business, and the statement of profit or loss calculates the budgeted gross and net profit for the period. Both of these statements require many additional budgets such as those mentioned above, and as such they are also beyond the scope of what we will cover here.

However, what we can do is put all of our budgets together, take our expenses away from our sales and arrive at a budgeted income figure. Let’s see how that works for Mikan’s Packs.

Budgeted income: Mikan’s Packs

For the summer season Mikan budgeted sales of 100 backpacks at £85 each.

Production included 20 units of opening stock and building up closing stock to 95 units ready for the next period. The production budget was therefore 175 units.

This would require using 40kg of material in opening stock and purchasing 350kg of new material, which would include 60kg in closing stock. At £5 per kg, the materials budget was £1,850.

The labour budget was £1,470, which covered the pay of 3 staff working 35 hours to manufacture the 175 backpacks at £14 per hour.

Mikan’s overheads came to £2,910, which included £2,700 in fixed overheads and £1.20 in variable overheads per unit.

We can put all of this into a budgeted income statement as follows:

This leaves a budgeted income of £2,270.