186 Understanding the Numbers
For a manufacturing company, cost of goods sold is computed similarly, but
in place of purchases we have the cost of the raw materials together with the
labor and overhead incurred in the manufacturing process. Beginning and end-
ing 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 ad-
ministrative expense budget. This budget may contain many fixed costs, some
of which may be avoidable if subsequent operations indicate 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 can-
not be avoided during the period are called committed fixed costs. Mortgage
payments, bond interest payments, and property taxes are classified as com-
mitted costs. Variable administrative costs may include some personnel costs, a
portion of the utility costs, computer service bureau costs, and supplies costs.
Fixed and variable costs and the application of these concepts to the budget
process is discussed in detail in Chapters 3 and 7.
C&G’s Gift Shop budgets selling expenses at 15% of sales. These are vari-
able costs since they change in proportion to changes 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 bud-
geted as $23,000 per month. These expenses might be rent, salaries of admin-
istrative personnel, and so forth. The administrative expense also contains a
variable component, budgeted at 10% of sales. Finally, depreciation is com-
puted 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 ref lects a commitment of most of the firm’s talent,
time, and resources for the period.
A firm may have budgeted nonoperating items such as interest on invest-
ments 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 nonoperat-
ing 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 should include expected taxes; therefore, the last figure in the bud-
geted income statement is budgeted after-tax net income.
Nonoperating 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 in-