Drivers in, statement out, then compare at the same volume

The master budget map

A master budget is two families of schedules. The operating budget starts with the sales forecast and runs through cost of goods sold and operating expenses to a budgeted income statement. The financial budget takes that result and adds capital spending, a cash budget and a budgeted balance sheet (and a budgeted cash-flow statement). The income statement comes first, always: the balance sheet needs its net income, and the cash budget needs its sales and purchases. Modules 9 and 10 build Boreal Bikes’ budgeted balance sheet and cash budget on the statement built here.

Drivers in, statement out

A budgeted income statement is built from drivers, not from last year’s lines grown by a percentage. Boreal Bikes’ 2026 drivers:

• Sales volume 12,000 bikes at an average price of $450
• Cost of goods sold 55 % of revenue
• Fixed operating costs $1,500,000;depreciation$200,000
• Interest $70,000; income tax 26 % of income before tax

Revenue              12,000 × $450          5,400,000
Cost of goods sold   55 % × 5,400,000       2,970,000
Gross profit                                2,430,000
Fixed operating costs                       1,500,000
Depreciation                                  200,000
EBIT                                          730,000
Interest                                       70,000
Income before tax                             660,000
Income tax           26 % × 660,000           171,600
Net income                                    488,400

In a spreadsheet each line is a formula on a driver cell — =B2*B3 for revenue, =B4*0.55 for COGS, =B9*0.26 for tax — so a change in one assumption flows through the whole statement. Tax is a rate applied to a result, not a driver you choose.

Flexing to the volume actually achieved

Suppose 2026 ends and Boreal sold 11,000 bikes, with EBIT of $500,000. Against the original budget’s $730,000 the shortfall is $230,000 — but most of that is the missing thousand bikes, which the sales team owns, not the factory or the stores. To judge cost control you compare actual to a budget flexed to the actual volume: the variable lines re-computed at 11,000 bikes, the fixed lines unchanged.

                     Original    Flexed      Actual
                     12,000      11,000      11,000
Revenue             5,400,000   4,950,000
Cost of goods sold  2,970,000   2,722,500
Gross profit        2,430,000   2,227,500
Fixed opex + dep.   1,700,000   1,700,000
EBIT                  730,000     527,500    500,000

At 11,000 bikes the budget would have expected EBIT of $527,500. Actual EBIT of $500,000 is $27,500 short of that — the part of the gap that is about costs and prices, not volume. The other $202,500 ($730,000-$527,500) is the volume shortfall. The course stops here: naming which line drove the $27,500, and pricing each variance, is the variance analysis of a later course. What the final asks is the principle — compare at the same volume — and the flexed figures.