How to Calculate a Budgeted Operating Income

Businesses create budgets in order to plan their future activities. Business owners need to understand their future profitability when deciding whether to expand into new areas, reduce the business offerings or keep everything the same. A budgeted income statement provides useful information for making these decisions. Budgeted operating income and budgeted net income both appear on the budgeted income statement. The operating income refers to money earned through operational activities. Net income refers to money earned from all activities. Budgeted operating income provides more value to the business owner as she considers the income generated from the primary business rather than additional activities.

Contact the sales manager. Ask him how many units they expect to sell during the budget period.

Request a copy of the company’s price list. Multiply each unit’s expected sales quantity by its selling price. Add these numbers together to calculate the total revenue for the budget period.

Request a copy of the company’s product cost list. Multiply each unit’s expected sales quantity by the product cost. Add these numbers together to calculate the total cost of goods sold for the budget period.

Obtain copies of each department’s expense budget. Add the total expenses together to calculate the total expenses for the budget period.

Highlight non-operating expenses. These include interest expense, income tax expense, reorganization cost or pension expense. Subtract these from the total expenses to calculate the total operating expenses for the budget period.

Subtract the total cost of goods sold and the total operating expenses for the budget period from the total revenues for the budget period. This calculates the budgeted operating income.

Tips

  • Use budget software to compile information from each department. Provide access to each manager and require them to enter their own data. Create a report to calculate the operating income based on the data entered. Whenever a manager changes her budget, run a new report using the new data.

Warnings

  • Realize that the budgeted operating income and the actual operating income may vary. The budgeted operating income relies on budgeted sales quantities and expense information. Budgeted information is based on events the company anticipates occurring during the budget period. Actual activities and dollar amounts may be different.

References