350977_3.9_Bus Man IBDP_362-374.

indd Page 367 10/02/22 6:05 PM elhiddn /146/HO02478/work/indd

researching costs for labour, fuel and raw materials by contacting suppliers and seeing if they
can negotiate price reductions for prompt payment or ordering in bulk ATL 3.9.1
considering government estimates for wage rises and inflation and incorporating these into Draw up your personal
future income and expenses budgets. budget for the next
month. Why would
Once a business has collected the necessary data, it is normal to draw up expected revenues from forecasting your
selling products – the income budget. This is the first budget to be constructed because, once expected income be a
a firm knows its expected sales, it can plan its production and calculate the forecast expenses good place to start?
associated with this.

Drawing up the expenses budget will entail considering:

the different types of goods and services that need to be produced
and the quantity of goods and services that will be required
Business
the quantities (and cost) of materials that will be required to meet objectives
production plans – this could include components and fuel as
well as raw materials
the quantity and cost of the labour input that will be necessary Information to prepare budgets can be
gained by analysing markets and
for production to take place reviewing previous budgets
the overheads, sales and administration expenses that will be
incurred by the planned level of production.
Taking these decisions enables the business to forecast the 1 Construct sales or revenue budgets
showing revenues from plan sales
expenditure or costs associated with producing enough to match
planned sales. It is vital in the setting of expenses budgets that
production allows a sufficient quantity and variety of products to be
supplied that will match the forecasted sales. It is impossible for a 2 Draw up production or expenditure budgets
showing costs incurred in meeting sales targets
business to increase its sales without producing more of its goods or
services to supply to customers.
Once production budgets and sales budgets are completed, it is
possible to compare incomes and expenses. This allows managers 3 From this a business can compare sales and production
budgets to give a figure for planned profits/losses
to prepare the net income budget, which sets out the business’s
expected profits or losses over the trading period. Figure 3.9.2 The budget setting process

The worked example shows how managers might construct a budget

from given data.

WORKED EXAMPLE
Constructing next year’s budget
The finance manager at Ko Samui Ltd is about to prepare the company’s budget for the next year. The company
manufactures e-scooters for sale in countries throughout Asia. She has researched the following information
before starting to construct her budget for the year.
The company’s market research forecasts that it will sell 32,250 e-scooters at an average selling price of
$1,000. The company will not earn any other income.
The finance director has calculated that salaries and wages amounted to 22 per cent of the selling price of an
e-scooter on average and that materials represented 40 per cent.

3.9 Budgets (HL only) 367