Preparing a Selling and Administrative Expenses Budget

Developing the Operating Budget

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Selling and administrative expense budget is a schedule of planned operating expenses excluding manufacturing costs. It is a component of the master budget and it is prepared by all types of businesses prior to the preparation of a budgeted income statement. Most often, it's divided in two sections: the selling expenses and the administrative expenses.

What Are Selling Expenses?

Both selling and administrative expenses may be fixed or variable.

For example, a sales commission is a variable selling expense dependent on a variety of factors. However, base salaries for salespeople are fixed selling expenses. Another example is the rent for an office building or space is a fixed administrative expense. But the cost of office supplies and utilities expenses are variable administrative expenses.

It's important to note that different variable selling and administrative expenses vary with different types of office functions. For example, sales commission varies based on a number of units sold. Also, take an entertainment expense for all employees in an organization; that will vary from month to month.

Operating Budget Review

The operating budget is one of the two parts of the master budget. The purpose of the operating budget is to describe the income-generating activities of the firm such as sales, production, and finished goods inventory.

The ultimate conclusion of the operating budget is the pro forma income statement and the operating profit margin. The operating profit margin is not the same as net profit, which you cannot calculate until you prepare the financial budget. The operating budget is prepared before the financial budget since many of the financing activities aren't known until the operating budget is prepared.

In developing a sample operating budget, I'm going to use a small pottery business, ArtCraft Pottery, located in Zanesville, OH, as my example. They produce reproductions of the famous art pottery produced in the Ohio area in the early 1900s.

The operating budget consists of a budgeted or forecasted income statement which is supported by a number of schedules:

Example:

If we use ArtCraft Pottery as our example, which comes from the article on Budgeting - How to Develop the Operating Budget, the following information can be used to develop the selling and administrative expenses budget

In order to develop the Selling and Administrative Expenses budget, you first have to analyze the Sales Budget of ArtCraft Pottery. You will get your sales information there. Here is the other information that you will need for this budget: Variable expenses are $0.10 per unit sold. Salaries are about $1,420 per quarter. Advertising for quarters 1 through 4 respectively is: $100, $200, $800, $500 respectively.

Here is the Selling and Administrative Expenses Budget for ArtCraft Pottery.

ArtCraft Pottery

Selling and Administrative Expenses Budget
Quarter1234Year
Units to be Sold1,0001,2001,5002,0005,700
Variable S&A Expenses Per Unitx0.10x0.10x0.10x0.10x0.10
Total Variable Expenses$100$120$150$$200$570
Fixed Selling and Administrative Expenses
Salaries$1,400$1,400$1,400$1,400$5,680
Utilities$50$50$50$50$200
Advertising$100$200$800$500$1,600
Depreciation$150$150$150$150$600
Total Fixed Expenses$1,720$1,820$2,420$2,120$8,080
Total S&A Expenses$1,820$1,940$2,570$2,320

$8,650