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VARIABLE BUDGET/PROFIT PROJECTIONS
7 CommentsVARIABLE BUDGET/PROFIT PROJECTIONS
This document is an extremely valuable management tool.
A fixed budget is of little value if the income projection is substantially off.
All of the other expenses based on the faulty projection will be off also.
With a variable budget, management can compare expenses with the actual volume.
In addition, this provides a Break Even Point without further calculations.
You can also play “what if”. For example, if sales are decreased by 5% but expenses remain the same
(as is the case in cutting prices) you can readily see how much more you must sell to make the same
profit. Sometimes some unexpected facts are discovered by using this document. I know of one company
which had multiple plants. In one of the plants the cost of water exceeded the budgeted figure for
three months straight. The amount was minor but an investigation found that there was a leak in an
under ground pipe and, if not corrected would have caused serious damage to the building.
This also makes possible “Management By Exception”. This merely means that if the actual costs and
expenses are reasonably close to the projected figures, management can forget about further analysis
and move on to more pressing tasks of running the business.
The following is an example of a variable budget. In the next chapter there is a template showing how to
construct a variable budget worksheet using your own figures.
Profit Projections Also known as Variable Budget Sales – Product 1 $70,000 $80,000 $90,000 $100,000 $110,000 $120,000 $130,000 Sales – Product 2 $21,000 $24,000 $27,000 $30,000 $33,000 $36,000 $39,000 Total Sales $91,000 $104,000 $117,000 $130,000 $143,000 $156,000 $169,000 Direct Costs Materials – Product 1 $26,250 $30,000 $33,750 $37,500 $41,250 $45,000 $48,750 Materials – Product 2 $9,660 $11,040 $12,420 $13,800 $15,180 $16,560 $17,940 Direct Labor $10,780 $12,320 $13,860 $15,400 $16,940 $18,480 $20,020 Manufacturing Supplies $1,295 $1,480 $1,665 $1,850 $2,035 $2,220 $2,405 Delivery Expense $3,360 $3,840 $4,320 $4,800 $5,280 $5,760 $6,240 Total Direct Costs $51,345 $58,680 $66,015 $73,350 $80,685 $88,020 $95,355 Gross Margin $39,655 $45,320 $50,985 $56,650 $62,315 $67,980 $73,645 Other Manufacturing Costs Maintenance – Building $100 $100 $100 $100 $100 $100 $100 Maintenance – Machinery $1,000 $1,000 $1,000 $1,000 $1,000 $1,000 $1,000 Maintenance – Trucks $2,000 $2,000 $2,000 $2,000 $2,000 $2,000 $2,000 Maintenance – Autos $1,700 $1,700 $1,700 $1,700 $1,700 $1,700 $1,700 Cleaning & Security $100 $100 $100 $100 $100 $100 $100 Rent $6,000 $6,000 $6,000 $6,000 $6,000 $6,000 $6,000 Electricity $1,164 $1,176 $1,188 $1,200 $1,212 $1,224 $1,236 Other Utilities $485 $490 $495 $500 $505 $510 $515 Depreciation $3,000 $3,000 $3,000 $3,000 $3,000 $3,000 $3,000 Total Other Manufacturing Costs $15,549 $15,566 $15,583 $15,600 $15,617 $15,634 $15,651 Selling Expense Salaries $2,000 $2,000 $2,000 $2,000 $2,000 $2,000 $2,000 Commissions $2,310 $2,640 $2,970 $3,300 $3,630 $3,960 $4,290 Advertising $50 $50 $50 $50 $50 $50 $50 Travel & Entertainment $400 $400 $400 $400 $400 $400 $400 Total Selling Expense $4,760 $5,090 $5,420 $5,750 $6,080 $6,410 $6,740 Administrative Expense Salaries – Executives $5,000 $5,000 $5,000 $5,000 $5,000 $5,000 $5,000 Salaries – Office $15,000 $15,000 $15,000 $15,000 $15,000 $15,000 $15,000 Health Insurance $2,500 $2,500 $2,500 $2,500 $2,500 $2,500 $2,500 Property Insurance $400 $400 $400 $400 $400 $400 $400 Other Insurance $100 $100 $100 $100 $100 $100 $100 Professional Fees $400 $400 $400 $400 $400 $400 $400 Local, Federal 7 State Taxes $2,000 $2,000 $2,000 $2,000 $2,000 $2,000 $2,000 Bad Debts $667 $667 $667 $667 $667 $667 $667 Contributions $100 $100 $100 $100 $100 $100 $100 Total Administrative Expense $26,167 $26,167 $26,167 $26,167 $26,167 $26,167 $26,167 Operating Profit ($6,821) ($1,503) $3,815 $9,133 $14,451 $19,769 $25,087 Interest Expense $1,250 $1,250 $1,250 $1,250 $1,250 $1,250 $1,250 Net Profit Before Income Taxes ($8,071) ($2,753) $2,565 $7,883 $13,201 $18,519 $23,837 From this you can see that the break even point is about $110,000 in sales volume. It also shows that each increase in Sales of about $ 13,000 yields a projected profit increase of about $ 5,000.
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Published on April 26, 2010 · Filed under: Uncategorized;
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