The budgeted income statement is a forecast of the company's earnings for a specific budget

period. In the first line in the budgeted income statement, is sales which come from the sales
budget. The Sales budget is a calculation of how many units of items the company expects to
sell multiplied by the expected unit price. The sales budget is the most important as it drives
most of the other budgets. Involved in its preparation is the sales staff under the Sales and
marketing manager.
Bamburi Cement Limited hires a marketing research consultant who reviews market trends for
cement and its other products and predicts demand for Bamburi products. The sales & marketing
manager, Harry, reviewed the market trends for the different brands of cement using data from
the market research consultant. From the market trends, the sales manager assumes that Bamburi
Cement’s sales will increase by a certain percent this coming year and that the average price per
unit will remain the same as last year. The sales manager does not expect any change in this
price so he uses 2020 prices. There is a need to have the 2020 actual sales to determine the
budgeted sales for the current year, 2021. Bamburi’s Sales budget would look as below:
Quarter 1 Quarter 2 Quarter 3 Quarter 4 Year
Sales in units 35,000 37,000 42,000 47,000 161,000
( bags)
Sales price $55 $55 $55 $55 $55
per unit
Sales revenue 1,925,000 2,035,000 2,310,000 2,585,000 8,855,000

Next, the Production budget is an estimate of units to be produced and is prepared based on the
sales budget projections. The production budget is prepared by the production staff under the
production manager. The production budget is based on sales predictions plus an estimate of
targeted ending finished goods inventory less beginning completed goods inventory. Bamburi
Cement has no ending work-in-progress inventory. The Bamburi management maintains 10% of
next quarter sales in ending inventory. For example, if next quarter’s units are 37,000 then 3,700
units (37,000 X 10%) will be in inventory at the end of the first quarter. Units needed for the first
quarter would be first-quarter unit sales plus the desired ending inventory deduct its leftover
units from the 2020 fourth quarter. Desired ending inventory = 10% X Next quarter sales.
Beginning inventory = Inventory at end of the previous quarter.
Under production are the direct materials, direct labor, and manufacturing overhead.
Next, we make the budget for direct materials purchases which is an estimate of the raw
materials necessary to meet a certain level of output. A certain amount of materials is required to
make a unit (in this case a bag of cement). Fourth-quarter desired ending inventory is based on
an estimate of materials needed in production first quarter of next year.
Beginning inventory = Inventory at end of the previous quarter, e.g., Second quarter beginning
inventory = First quarter ending inventory. Bamburi’s budget for direct materials purchases
looks as below:
To make the budget for direct materials purchases, take units produced (from the production
budget) multiplied by materials required per unit (bags), we get materials needed for production.
From this we add to ending inventory (Bamburi calculates 20% of next quarter production needs
as desired ending inventory), the result being materials needed inventory. From this we deduct
beginning inventory to get materials to be purchased in pounds which we multiply by the cost of
materials per pound, the result is the cost of materials to be purchased.
Next, is the Direct Labor Budget, which is an estimate of the number of direct labor hours, and
associated costs, necessary to attain a specified level of output. Bamburi takes 10 minutes to
produce 1 bag of cement. Its hourly labor rate is $20
To make the direct labor budget, we take the units to be produced multiplied by labor hours per
unit to get the direct labor hours needed in production. With this, we multiply the labor rate per
hour to get direct labor cost.
Next, we make the manufacturing overhead budget which is an estimate of all production
costs, other than direct, materials, and direct labor, necessary to attain a desired level of
production. Manufacturing overheads are dived into variable overhead costs and fixed overhead
costs. To make the manufacturing overhead budget, we add the indirect materials per unit
multiplied by the units to be produced from the production budget to indirect labor per unit
multiplied by the units to be produced, we add the other variable overhead per unit cost
multiplied by the units to be produced, the total being total variable overheads. We add the fixed
overheads (Salaries, rent, depreciation) to get the total overhead costs. If we need cash payments
for overhead we deduct depreciation. To find manufacturing overhead per unit we take the Total
overhead cost divided by total units produced for that year.
Finally, we prepare the selling and administration budget which is an estimate of all operating
costs other than production.
We get the result of adding Salaries, rent, advertising, depreciation, the result being selling and
administration costs.
Preparing the Budgeted Income statement, prepared by the accounts staff in collaboration with
the production and the sales departments.
Bamburi Cement limited
Budgeted Income Statement
Year ending December 31
Quarter 1 Quarter 2 Quarter 3 Quarter 4 Year
Sales (sales xx xx xx xx xxxx
budget)
Less: Cost of (xx) (xx) (xx) (xx) (xxx)
goods sold:
Direct
materials
 ( direct
materials
budget)
Direct labor
( direct labor
budget)
Manufacturin
g overhead
( manufacturin
g overhead
budget)
Gross profit xx xx xx xx xxxx
margin
Less: Selling xx xx xx xx XXXX
and
administrative
costs ( selling
and
administrative
budget)
Net income. xxxx xxxx xxxx xxxx xxxx
 References
Heisinger & Hoyle (n.d.). Accounting for Managers. Retrieved at:

https://2012books.lardbucket.org/books/accounting-for-managers/index.html