How to Calculate Budgeted Cost of Goods Sold

>> December 4, 2012

For preparing budgeted income statement, we need to calculate the budgeted cost of goods sold. First of all, you should understand the actual cost of goods sold. After this you can understand budgeted cost of goods sold. Actual cost of goods sold means the cost of products which have been sold to our customer.

We can calculate this cost by following simple formula.

 Opening stock + purchase + direct expenses - closing stock

or Opening Stock ( Raw material + W.I.P. + Finished Goods) + Purchase (Raw material) + Direct Expenses ( Direct labor cost+ manufacturing overheads) - Closing stock  ( Raw material + W.I.P. + Finished Goods

 {In manufacturing organisation, we calculate opening stock by adding the opening stock of raw material, opening stock of work in process and opening stock of finished goods. Purchase will be only of raw material. In direct expenses, we will include the direct labor cost and manufacturing overheads. We calculate the closing stock by adding the closing stock of raw material, closing stock of WIP and closing stock of finished goods. After this, we apply above formula}

 Budgeted cost of goods sold is estimated cost of goods which will be sold to customers upto the end of the year.

We will follow the following steps for calculating it.

 1st Step : To Calculated Budgeted Sales

 This is the first step which you will take for finding the budgeted cost of goods sold. You can not find the budgeted cost of goods sold, if you did not find the budgeted sale. Budgeted sale means expected quantity of goods which you will sell within one year. There are lots of factor which affects this. Demand of customer may increase or may decrease. So, you have to set the quantity you will sell. It may be actual sale + 10% increase in previous sale quantity or  actual sale - 10% decrease in previous sale quantity.

 2nd Step : To Calculated Budgeted Purchase

  After calculating, budgeted sales quantity, you have to calculate the budgeted purchase quantity and budgeted purchase price per unit. You also have to fix, how much will you have to buy on credit and on cash?

 a) Budgeted purchase quantity 

 Budgeted purchase quantity will depend on the budgeted sale quantity, opening balance of raw material, opening balance of W.I.P. and Opening balance of finished goods. After study all these factors, we can fix the budgeted purchase quantity.

 b) Budgeted purchase price 

Budgeted purchase price  may be fix on the basis of market trend, your past dealing and your bought quantity. So, after study this, you can fix budgeted purchase price.

 c) Budgeted Credit and Cash Purchase 

Budgeted cash purchase depends on the fund in your pocket. So, study the cash budget for this. Rest you have to buy through credit. Its total will be total budgeted purchase. We will deduct estimated purchase return out of this. In end, net budgeted purchase will be the part of calculating budgeted cost of goods sold.

 3rd Step : To Calculated Budgeted Direct Expenses

In budgeted direct expenses, you should include the budgeted direct labor cost and manufacturing overheads. It depends on the labor laws and estimated money available for this and estimated production.

4th Step : To Calculated Budgeted Closing Inventory

We can calculate budgeted closing inventory with following way.
Beginning Inventory ( Actual Quantity)XXXXXXXX
Add: Forecasted Purchase during the year ( in Quantity)XXXXXXXX
Less: Forecasted Sale  During the Year ( in Quantity)XXXXXXXX
Equals:  Ending Inventory ( in Quantity)XXXXXXXX
Now, one the basis of budgeted purchase price, we can calculate average cost per unit of inventory. On this basis, we can calculate budgeted cost of goods sold.

Example : After calculating the figures from above steps, we can calculate budgeted cost of goods sold. See following example:-

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Rakesh December 7, 2012 at 5:45 AM  

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Anonymous,  October 19, 2014 at 11:40 PM  

Hey Vinod, this is very well explained, very crisp and very quick referencener.
I searched 3-4 other websites but yours explanation is far above average.
Many Thanks...!!


Jinal Sh

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