1. Step 6: PREPARE THE ENDING INVENTORIES BUDGET. Schedule 6A shows the computation of the unit cost of coffee tables started and completed in 2020. Stylistic uses these calculations for the ending inventories budget and the budgeted cost of goods sold. In accordance with Generally Accepted Accounting Principles, inventoriable (product) costs include direct costs and both variable and fixed manufacturing overhead. Stylistic allocates to finished-goods inventory manufacturing operations overhead costs at the budgeted rate of $30 per direct manufacturing labor-hour and machine setup overhead costs at the budgeted rate of $200 per setup-hour.

1. Under the FIFO method, managers use this unit cost to calculate the cost of target ending inventories of finished goods in Schedule 6B.

1. Step 7: PREPARE THE COST OF GOODS SOLD BUDGET. The manufacturing and purchase managers, together with the management accountant, use information from Schedules 3–6 to prepare Schedule 7—the cost of goods sold expense budget that will be subtracted from revenues to calculate Stylistic’s budgeted gross margin for 2020.

1. Step 8: PREPARE THE OPERATING (NONMANUFACTURING) COSTS BUDGET. Schedules 2–7 represent budgets for Stylistic’s manufacturing costs. Stylistic also incurs operating (nonmanufacturing) costs in other parts of the value chain—product design, marketing, and distribution. Just as in the case of manufacturing costs, the key to managing operating overhead costs is to understand the various activities and quantities of cost drivers to efficiently design, market, and distribute Deluxe and Casual tables in 2020.
2. The number of design changes is the cost driver for product design costs. Product design costs of $1,024,000 are fixed costs for 2020 and adjusted at the start of the year based on the number of design changes planned for 2020.

1. Total revenue is the cost driver for the variable portion of marketing (and sales) costs. The commission paid to salespeople equals $0.065 per dollar (or 6.5%) of revenues. Managers budget the fixed component of marketing costs, $1,330,000, at the start of the year based on budgeted revenues for 2020. Cubic feet of tables sold and shipped $(\text{Casual:\hspace{0.17em}18\hspace{0.17em}cubic\hspace{0.17em}feet}\times 50\text{,}000\hspace{0.17em}\text{tables}+\text{Deluxe:\hspace{0.17em}24\hspace{0.17em}cubic\hspace{0.17em}feet}\times 10\text{,}000\hspace{0.17em}\text{tables}=1\text{,}140\text{,}000\hspace{0.17em}\text{cubic\hspace{0.17em}feet})$
2. is the cost driver of the variable component of budgeted distribution costs. Variable distribution costs equal $2 per cubic foot. The fixed component of budgeted distribution costs equal to $1,596,000 varies with the company’s distribution capacity, which in 2020 is 1,140,000 cubic feet (to support the distribution of 50,000 Casual tables and 10,000 Deluxe tables). For brevity, Schedule 8 shows the product design, marketing, and distribution costs budget for 2020 in a single schedule.

1. Innovation is an important item on the agenda of most companies. Sometimes, as in the case of Stylistic, the product design innovations are incremental or small, with the benefits of the innovation generating revenues within the same year. In other cases, the innovations, such as developing new medicines, are radical or breakthrough innovations. Research and development (R&D) costs may have to be incurred for several years before any revenues are realized.^* Management accountants separately budget for and track breakthrough innovations to isolate operational performance for the year from investments in innovation for subsequent years. They develop project milestones, such as expert evaluations, intellectual property creation, patents received, and customer engagement, to monitor progress and value creation of the innovation projects.
2. Step 9: PREPARE THE BUDGETED OPERATING INCOME STATEMENT. The CEO and managers of various business functions, with help from the management accountant, use information in Schedules 1, 7, and 8 to finalize the budgeted operating income statement, shown in Exhibit 6-3. The style used in Exhibit 6-3 is typical, but managers and accountants could include more details in the income statement. As more details are put in the income statement, fewer supporting schedules are needed.

Budgeting is a cross-functional activity. The strategies developed by top managers for achieving a company’s revenue and operating income goals affect the costs planned for the different business functions of the value chain. For example, the budgeted increase in sales at Stylistic is based on spending more for marketing and must be matched with higher production costs to ensure there is an adequate supply of tables and with higher distribution costs to ensure the timely delivery of tables to customers.

Rex Jordan, the CEO of Stylistic Furniture, is very pleased with the 2020 budget and the plans to increase operating income by 10% compared with 2019. The keys to achieving higher operating income are a significant increase in sales of Deluxe tables and process improvements and efficiency gains throughout the value chain. As Jordan studies the budget more carefully, he is struck by two comments appended to the budget: First, changes in the competitive environment may require Stylistic to reduce selling prices by 3% to $582 for Casual tables and to $776 for Deluxe tables to achieve the budgeted number of tables sold. Second, supply shortages of direct materials may result in prices of direct materials (red oak and granite) to be 5% higher than budgeted. In this second scenario, selling prices are anticipated to remain unchanged. He asks Tina Larsen, a management accountant, to use Stylistic’s financial planning model to evaluate how these events will affect budgeted operating income.