Table of Contents

Introduction. 3

Incremental budget 3

Income Statement budget 3

Financial Assumptions. 4

Evaluation. 5

Conclusion. 9

References. 10

Introduction of The incremental budget is established on the basis of the previous budget

Incremental budget

The incremental budget is established on the basis of the previous budget. In other words, it can be said that an incremental budget is prepared on the basis of the actual performance of the organization. In an incremental budget, incremental values are added to the previous data. Many organizations utilize the incremental budgeting approach for creating the budget. The resources are allocated on the basis of previous period data and due to this the budget does not consider changes that occur with the passage of time. The budget helps the corporations to allocate their resources efficiently and avoid overspending.

There are many advantages and disadvantages of incremental budgeting. One of the major advantages of incremental budgeting is that this type of budget is considered stable because the change that occurs is gradual. It helps the managers to operate their departments consistently without any major issue. The incremental budget is easy to create and can be understood by many individuals in the organization. In this budget impact of change can be monitored effectively and achieving coordination between budgets is possible. The major drawback of this budget is that there is no incentive regarding reducing costs and establishing new ideas (Warren, et al., 2016).

Income Statement budget: The income statement budget or budgeted income statement provides information like every income statement provides however the budgeted income statement includes the information regarding the future. The budgeted income statement includes the projections which help the organization to understand how their revenues and expenses will grow in the upcoming years. The budgeted income statement is prepared with the help of other budgets which include sales budget, cost of sales budget, and selling and administrative budget. The budgeted income statement is quite useful for the organization to determine whether their projections are reasonable or not (Wiley, 2020).

There are many steps for the preparation of the income statement budget. The first thing which the organization performs is to estimate the number of sales. After estimating the number of sales the organization determines the cost of production. The selling and administrative expense are also estimated for the upcoming years. The estimation of the items of income statements done on the basis of previous data available by the corporation. The budget income statement is used for the purpose of planning by the organizations. The organization takes various financial decisions on the basis of the income statement budget. The investors also evaluate budgeted income statements to make investment decisions (Warren, et al., 2016).

Financial Assumptions

Table 1: Baseline Data

Table 2: Percentage of Annual Increase

It is estimated that the annual sales volume will be 3200 which will increase in the upcoming years with 20%. The selling price is assumed to be 5.15 and will increase by 10% in the following years. Finished goods inventory is estimated to be 640 that will increase with the rate of 20%. The cost of production is 2.75 and will increase by 10% in the upcoming years. The selling and admin expenses are 160 and 1000. It is estimated that the selling and admin expenses will increase with the rate of 5%. Finally, the other expenses are 500 that are estimated to increase with the rate of 1%. in order to create income statement budget first sales budget, the cost of sales budget and selling and admin budget are going to be created first (Chandra, 2011).

Evaluation

Table 3: Sales Budget

As the baseline data shows that the annual sales volume is 3200. In the upcoming 5 years, the sales volume increases with a rate of 20%. In the first year, the sales volume is estimated to be 3840. Which will increase over the year and will become 7963 in the 5^th year. It can be seen that in the upcoming years the sales volume has experienced a significant amount of growth. Along with sales volume, the selling price has also increased with a rate of 10%. In the first year, the selling price was estimated to be 5.65 which increased significantly over the years and reached 8.29 in the upcoming 5^th year (Mulford & Comiskey, 2011).

Table 4: Cost of Sales Budget

It is estimated that the annual sales volume will be 3200 which will increase in the upcoming years with 20%. The selling price is assumed to be 5.15 and will increase by 10% in the following years. Finished goods inventory is estimated to be 640 that will increase with the rate of 20%. The cost of production is 2.75 and will increase by 10% in the upcoming years.  It is assumed that the beginning inventory for the 5 year period will be the ending inventory of the last year. The ending finished goods inventory is assumed to be 20% of the annual sales volume. As the sales volume increases the required production also increases as a result. As a result of higher sales volume, the cost of sales also increases in the following years (Linares-Mustarós, et al., 2018).

Table 5: Selling & Admin Budget

As the baseline data shows that the annual selling expenses are 160 and admin expenses are 1050. In the upcoming 5 years, the selling and administrative expenses increase with a rate of 5%. In the first year, the selling & admin expenses are estimated to be 168 and 1050 respectively. Which will increase over the year and will become 204 and 1276 in the 5^th year. It can be seen that in the upcoming years the selling and admin expenses have experienced a significant amount of growth. Along with selling and admin expenses, the other expenses have also increased with a rate of 1%. In the first year, the other expenses were estimated to be 505 which increased significantly over the years and reached 5.25 in the upcoming 5^th year. The total selling and admin budget are estimated to be 1723 in the first year which will grow and reach 2006 in the following years.

Table 6: Budgeted Income Statement

The budgeted income statement is created after combing the sales budget, cost of sales budget, and selling and administration budget. Through the budget income statement, it can be said that the sales will experience growth in the following years. Due to an increase in the number of sales the cost of sales also increases as a result. The higher revenues have increased the net profit in the upcoming 5 years (Fridson & Alvarez, 2011).

Conclusion of The incremental budget is established on the basis of the previous budget

It is concluded that there are many steps for the preparation of the income statement budget. The first thing which the organization performs is to estimate the number of sales. After estimating the number of sales the organization determines the cost of production. The selling and administrative expense are also estimated for the upcoming years. The estimation of the items of income statements done on the basis of previous data available by the corporation. The budget income statement is used for the purpose of planning by the organizations. It is estimated that the annual sales volume will be 3200 which will increase in the upcoming years with 20%. The selling price is assumed to be 5.15 and will increase by 10% in the following years. Finished goods inventory is estimated to be 640 that will increase with the rate of 20%. The cost of production is 2.75 and will increase by 10% in the upcoming years. 

References of The incremental budget is established on the basis of the previous budget

Chandra, P., 2011. Financial Management. s.l. Tata McGraw-Hill Education.

Fridson, M. S. & Alvarez, F., 2011. Financial Statement Analysis: A Practitioner's Guide. s.l.: John Wiley & Sons.

Linares-Mustarós, S., Coenders, G. & Vives-Mestres, M., 2018. Financial performance and distress profiles. From classification according to financial ratios to compositional classification. Advances in Accounting, Volume 40, pp. 1-10.

Mulford, C. W. & Comiskey, E. E., 2011. The Financial Numbers Game: Detecting Creative Accounting Practices. s.l.: John Wiley & Sons.

Warren, C., Reeve, J. M. & Duchac, J., 2016. Financial & Managerial Accounting. s.l. Cengage Learning.

Wiley, C., 2020. What Is a Budgeted Income Statement?. [Online]
Available at: https://smallbusiness.chron.com/budgeted-income-statement-22939.html