Concept explainers
Budgeting in a Service Organization
Executive Solutions is a strategy consulting firm. Other than the senior leadership (who manage the firm, but do not actively consult), the managers and staff are billed to clients on an hourly basis. The workload varies quite a bit from month to month requiring careful planning.
Managers are billed to clients at a rate of $900 per hour and staff at a rate of $450 per hour. Managers are paid $225 per hour worked (including nonbillable time) and staff are paid $125 per hour. The current plan calls for managers to bill 1,200 hours in May and 750 hours in June. Staff are expected to bill 6,400 hours in May and 4,500 hours in June. Managers will work a total of 2,400 hours in both months and staff will work a total of 9,600 hours in both months.
Other monthly costs (all fixed) are $550,000 SG&A, $225,000 in
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Prepare a
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FUNDAMENTALS OF COST ACCOUNTING
- You are the managerial accountant at Reliable Company and are part of the organization’s budgeting committee. You have been assigned to support the marketing department and manage its master budget. The marketing department is responsible for the following: • Managing the firm's marketing • Hiring subcontractors • Selling the consulting expertise to smaller outside firms The department's expenses are as follows: • Salaries and benefits of $48,000/month • Web site operations of $21,000/ month • Online advertising expenses of $15,000/month • Miscellaneous expenses of $3,500/month The sales forecast for its consulting services are as follows: • April: $190,000 • May: $200,000 • June: $205,000 The department pays a sales commission of 5%, and this is paid in the following month. Subcontractor expenses are estimated at 45% of sales and are paid the month after they are billed. Consulting fees are collected 20% in the month of sale, 70% in the following month, and 10% in…arrow_forwardYou are the managerial accountant at Reliable Company and are part of the organization’s budgeting committee. You have been assigned to support the marketing department and manage its master budget. The marketing department is responsible for the following: • Managing the firm's marketing • Hiring subcontractors • Selling the consulting expertise to smaller outside firms The department's expenses are as follows: • Salaries and benefits of $48,000/month • Web site operations of $21,000/ month • Online advertising expenses of $15,000/month • Miscellaneous expenses of $3,500/month The sales forecast for its consulting services are as follows: • April: $190,000 • May: $200,000 • June: $205,000 The department pays a sales commission of 5%, and this is paid in the following month. Subcontractor expenses are estimated at 45% of sales and are paid the month after they are billed. Consulting fees are collected 20% in the month of sale, 70% in the following month, and 10% in…arrow_forwardYou have just been hired into a management position which requires the application of your budgeting skills. You find out that budgeting has not been a priority of the company. You have contacted various areas on the organization and have accumulated the information below to assist you in preparing a comprehensive budget. Manufacturing Inc. produces a part used in the production of engines. Actual Sales and Projected sales in units: March (Actual) 38,000 April 40,000 May 42,000 June 45,000 July 44,000 Sales are the following type: 51% Cash sales collected in month of sale 49% Credit sales collected in the following month of sale…arrow_forward
- Swifty Corporation provides financial consulting and sells its own line of financial planners and budgeting products. The company has collected the following data for the next year's budgeted activity for a lead consultant and the supplies clerk. Consultants' wages Benefits Related overhead Clerk's wages Benefits Related overhead Profit margin per hour Profit margin on materials Total estimated consulting hours Total estimated material costs $100000 O $19.00. O $58.00. O $50.67. O $38.00. 60000 30000 $19000 3000 15000 $20 The labor rate per hour for this consultant is 15 % 5000 $172000arrow_forwardLegal Corporation offers a wide range of legal services to its customers. Each of the firm's attorneys can negotiate billing rates with their clients. Legal Corporation set a budget at the start of the year to better manage its operations. Total billed hours, amount billed per hour, and variable expense per hour were all included in the budget. Unfortunately, the firm failed to meet its budgeted goals for last year. The results are shown below. Actual Budget Total hours billed 5,800 6,100 Amount billed/hour $375 $425 The hourly variable expense was estimated at $60, but the total variable expense was $295,000. The reasons for the firm's failure to fulfill its budgeted targets are a source of contention among the attorneys. Calculate the variance in variable expenses. Make your computations visible.arrow_forwardProfessional Labor Cost Budget Day & Spieth, CPAs, offer three types of services to clients: auditing, tax, and small business accounting. Based on experience and projected growth, the following billable hours have been estimated for the year ending March 31, 20Y6: Billable Hours Audit Department: Staff 28,200 Partners 4,200 Tax Department: Staff 20,600 Partners 2,600 Small Business Accounting Department: Staff 3,400 Partners 500 Assume that the average compensation per hour for staff is $65 and for partners is $160. Prepare a professional labor cost budget for Day & Spieth, CPAs, for the year ending March 31, 20Y6. Enter all amounts as positive numbers. DAY & SPIETH, CPAs Professional Labor Cost Budget For the Year Ending March 31, 20Y6 Staff Partners Audit Department Hours fill in the blank 1 fill in the blank 2 Tax Department Hours fill in the blank 3 fill in the blank 4 Small Business Accounting…arrow_forward
- Planning and Control Many companies use budgets for three purposes. First, they use them to plan how to deploy resources to best serve customers. Second, they use them to establish challenging goals, or stretch targets, to motivate employees to strive for exceptional results. Third, they use them to evaluate and reward employees. Assume that you are a sales manager working with your boss to create a sales budget for next year. Once the sales budget is established, it will influence how other departments within the company plan to deploy their resources. For example, the manufacturing manager will plan to produce enough units to meet budgeted unit sales. The sales budget will also be instrumental in determining your pay raise, potential for promotion, and bonus. If actual sales exceed the sales budget, it bodes well for your career. If actual sales are less than budgeted sales, it will diminish your financial compensation and potential for promotion. Required: 1. Do you think it would…arrow_forwardPittman Company is a small but growing manufacturer of telecommunications equipment. The company has no sales force of its own; rather, it relies completely on independent sales agents to market its products. These agents are paid a sales commission of 15% for all items sold. Barbara Cheney, Pittman's controller, has just prepared the company's budgeted income statement for next year as follows: Pittman Company Budgeted Income Statement For the Year Ended December 31 Sales Manufacturing expenses: Variable Fixed overhead Gross margin Selling and administrative expenses: Commissions to agents. Fixed marketing expenses Fixed administrative expenses Net operating income Fixed interest expenses Income before income taxes Income taxes (30%) Net income $11,025,000 3,430,000 The breakdown of the $3,675,000 cost follows: 3,675,000 Salaries: 171,500* Sales manager 2,140,000 *Primarily depreciation on storage facilities. As Barbara handed the statement to Karl Vecci, Pittman's president, she…arrow_forwardIn addition to putting the budget in an Excel spreadsheet; the following items are required: Describe three actual team building activities- use actual costs if possible Write a proposal for a Six Sigma project. Project should center around one of the following issues – low attendance, orders being entered into system incorrectly, or high turnover Write an announcement explaining that three positions are being eliminated in November. Keep in mind reassuring the remaining employees that their jobs are not be effected if productivity and profits go up.arrow_forward
- Bowflex Corporation is organized as a decentralized company. The strength division is organized as a Cost Center and reports the following costs: Line Item Full Year Budget Full Year Actuals Production Line Wages $20,000 $30,000 Production Line Salaries 40,000 55,000 Property Depreciation 25,000 20,000 Overhead Costs 15,000 12,000 Prepare a brief Cost Center Budget Performance Report AND include what the first action you would take as a financial controller would be.arrow_forwardProfessional ethics and reporting division performance. Maria Mendez is division controller and James Dalton is division manager of the Hestor Shoe Company. Mendez has line responsibility to Dalton, but she also has staff responsibility to the company controller. Dalton is under severe pressure to achieve the budgeted division income for the year. He has asked Mendez to book $200,000 of revenues on December 31. The customers’ orders are firm, but the shoes are still in the production process. They will be shipped on or around January 4. Dalton says to Mendez, “The key event is getting the sales order, not shipping the shoes. You should support me, not obstruct my reaching division goals.” Describe Mendez’s ethical responsibilities. What should Mendez do if Dalton gives her a direct order to book the sales?arrow_forwardSigma PLC are a Certified Chartered Management Accountant firm. The firm has a number of clients who regularly require support concerning monthly and quarterly management accounting issues. The key issue that has been raised by a major client, Barry Prior PLC is around the scope, purpose and procedures involved in the annual budgeting process. To assist with the client’s query, the Accounting firm has been asked by the Senior Partner to prepare a report to highlight the key characteristics of budgeting. REQUIREMENT : Prepare a report that: 1.Describes the SIX main purposes of budgeting 2.Explains the difference between fixed and flexible budgets 3. Briefly outlines the functional budgets that may be prepared as part of the budgeting process. 4.Describes TWO behavioural issues that may arise from the budgeting process.arrow_forward
- Cornerstones of Cost Management (Cornerstones Ser...AccountingISBN:9781305970663Author:Don R. Hansen, Maryanne M. MowenPublisher:Cengage Learning