When preparing and expense budget, it is important to understand revenues and expenses and how they fit into an income statement.You may need to revise your accounting!
Here is a summary of the Income Statement for a business that sells or makes products.
Cost of Goods Sold or COGS is the cost of buying the inventory (stock) for sale and also the costs to get the items into the business.
If the product is being made or produced, COGS also includes the other costs required to make or produce the product.
Budgeting for the COGS expense involves planning and understanding the future sales predictions to know what will need to be purchased or produce. In budgeting terms a sales budget, purchases budget and production budget will be required.
Operating expenses are general costs to run the business and also to market and distribute the produced or finished goods.
To do budgeting accountants and managers must understand how costs behave and can be classified as fixed and variable. Some costs stay the same even if the business produces more (fixed costs). Alternatively costs may increase as activity increases (selling or producing) increases (variable costs).
Another way costs are classified is as either direct or indirectly related to the production of a product.Back to Management Accounting Questions and Answers