Have you ever watched birds live life. They always seem to be singing, always happy and never worry. A lot of business starts up businesses with a tune in their heart. They have a dream and are driven to achieve it, but somewhere along the line they lose their song. If you find yourself not singing anymore then it is time to stop and re-evaluate your actions. Like birds, we should enjoy our journey and sing all along the way. After all, is this not why we are in business for ourselves? If the song is lost then the vision is not as sweet even after it is achieved.
We all know when a ball is thrown up it will eventually fall down, if you put one feet in front of the other, you move forward. In the same way as business owners you can plan for predictability rather than chance. I recently read on a website about a small business that used Groupon and almost got buried from this service. The problem with this statement is this business owner had planned for chance and not predictability. What do I mean by planning for chance? The owners of this small business believed if they advertised Groupon that somehow they will get increased business which will increase profitability in the long run. The problem with this logic was this business was willing to take a loss for transactions with business generated by Groupon. The goal was to get them in and retain them as customers over the long run. This reasoning was purely left to chance as there was no data leading them to believe that Groupon customers eventually become loyal. Planning for predictability would have sought to use data to predict the most likely outcomes of the partnership. As business owners when we fail to do our due diligence we are planning for chance. The more due diligence we do, the more tried and true methods we use, the more likely our results resemble our plan.
The information derived from all the previous steps is used in creating a budgeted income statement.
These include other indirect costs not directly related to the manufacturing of product such as marketing, distribution, customer service and administration.
Final: Preparing the Budgeted Income Statement
Using the direct material usage budget, direct material purchase budget, direct material labor costs budget, manufacturing overhead budget and ending inventory budget, prepare a cost of goods sold budget. The process to compute this cost is as follows:
Direct materials used + Direct manufacturing labor + Manufacturing overhead costs = cost of goods manufactured
Beginning finished goods inventory + cost of goods manufactured = cost of goods available for sale
Cost of goods available for sale – ending finished goods inventory = cost of goods sold.
Next: Preparing the Non-manufacturing Costs Budget.
The ending inventory for one period becomes the beginning inventory for another period. Considering the fact that as a business you will not like to start each period with zero inventory, a projection will need to be made to be made with how much inventory should remain at the end of each period. Once the units of inventory has been determined, it is multiplies by the unit costs to determine the cost involved in maintaining this inventory at the end of the period.
Next: Preparing the Cost of Goods Sold Budget
Manufacturing Overhead Costs Budget: A basis for determining overhead costs will be last year’s numbers. After gathering last year’s numbers, you can compute any expected increase and reductions based on efficient processes that might have being implemented. Overhead costs could be both fixed and variable. Fixed and variable overhead are added to compute the overhead costs per cost driver unit. For instance if company x has $15,000 of fixed overhead costs and $5,000 of variable overhead costs, total overhead costs will be $20,000. If 200 units were to be produced then budgeted overhead cost per unit will be $100. According to general accepted principles both fixed and variable overhead costs are inventoriable costs.
Next: Preparing the Ending Inventories Budget