By:Tyson Pruett

I recently was over in Idaho working with a consultant to the healthcare industry. While we were discussing the exciting world of accounting, they mentioned a variation on the traditional budget that I thought was worth passing on to our readers. Now before you print this out and put it beside your bed as a cure for insomnia, let me just say that I will do my best to keep this short and give you an example to make it “real”.

In traditional budgeting, you budget for sale of 100 widgets. If you sell 95 or 103, your budget numbers will be off slightly by that difference. A traditional budget would look similar to the example below:

             Budgeted  Actual  Difference

Number of Widgets100___95_______(5)
Sales_____________10,0009,500_500
COGS______________(5,000)(4,900)_(100)
Gross Profit 5,000 4,600 400
Gross Profit % 50% 48%
Rent (1,000) (1,000) -
Commissions (500) (475) 25
Freight (250) (225) 25
Office Expense (750) (750) -

G & A (2,500) (2,450) 50

Net Profit 2,500 2,150

As you can see, there are differences between budgeted and actual numbers but with having sold 5 fewer widgets, this makes sense.

What we are proposing people do is modify the budgets so that they have a standard budget for the sale of those 100 widgets, but they then add a column that takes into account the variable costs at the actual number rather than just the budgeted numbers. It would look something like the chart below.

         Budget @       
 Budgeted    Actual      95 Widgets     Variance    % Diff.

of Widgets 100 95 95

Sales 10,000 9,500 9,500 -
Cost of Goods Sold (5,000) (4,900) (4,750) (150) 3% Gross Profit 5,000 4,600 4,750
Gross Profit % 50% 48% 50%

Rent (1,000) (1,000) (1,000) -
Commissions (500) (475) (475) -
Freight (250) (225) (238) (13) 5% Office Expense (750) (750) (750) -
G & A (2,500) (2,450) (2,463)

Net Profit 2,500 2,150 2,288

As you can see, this version quickly points out that your costs of good are 3% higher than you budgeted and your freight is 5% higher. That would have been very difficult for you to determine from the first budget without some additional work.

If you would like to discuss this further or have questions on how this could be modified for your specific circumstances, please let us know and we would be happy to assist you.