Revised operating budget: consulting firm
Clark Services, a division of General Service Industries operating in New Zealand, offers consulting services to clients. The corporate management at General Service is pleased with the performance of Clark Services for the first nine months of the current year and has recommended that the divisional manager of Clark Services, Dick Smyth, submit a revised budget for the remaining quarter, as the division has exceeded the budgeted operating profit for the year to date by 20 per cent. An unexpected increase in the number of billed hours over the original plan is the main reason for this increase in profit. The original operating budget for the first three quarters for Clark Services is as follows:
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Revenue Consulting fees:
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Clark Services
Operating Budget
1st quarter 2nd quarter
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3rd
quarter
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Nine
months
|
|
Management consulting
|
S 945000
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$ 945 000
|
$945000
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$2835000
|
|
Computer system consulting
|
1 265625
|
1 265625
|
1 265625
|
3796875
|
|
|
|
|
|
Total consulting fees
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$2210625
|
$2210625
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$2210625
|
$6631 875
|
|
Other revenue
|
100000
|
100000
|
100 000
|
300000
|
|
Total revenue
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$2 310 625
|
$2 310 625
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$2310625
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$6931875
|
|
Expenses
|
|
|
|
|
|
Consultant salary
|
Si 160250
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$1 160250
|
S1 160250
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$3480750
|
|
Travel
|
136875
|
136875
|
136875
|
410625
|
|
General and administrative
|
300000
|
300000
|
300000
|
900000
|
|
Depreciation
|
120000
|
120000
|
120000
|
360000
|
|
Corporate allocation
|
150000
|
150000
|
150000
|
450000
|
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Total expenses
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$1 867 125
|
$1 867 125
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$1 867 125
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$5601375
|
|
Operating profit
|
S 443 500
|
$ 443500
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$ 443 500
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$1330500
|
|
|
Smyth will take the following information into account in his revised budget for the fourth quarter:
- The division currently has 25 consultants on staff-10 for management consulting and 15 for computer systems consulting. Three additional management consultants have been hired to start work at the beginning of the fourth quarter in order to meet the increased client demand.
- The hourly billing rate for consulting revenue will remain at $270 per hour for each management consultant and $225 per hour for each computer consultant. However, due to the increase in billed hours compared with the plan during the first nine months, the budgeted billed hours be increased by an additional 50 hours for each consultant (new and old) in the fourth quarter.
- The budgeted annual salaries and actual annual salaries, paid monthly, are the same: $150000 for a management consultant and $138000 for a computer consultant. Corporate management has approved a merit increase of 10 per cent at the beginning of the fourth quarter for all 25 existing consultants, while the new consultants will be compensated at the planned rate.
- The planned salary expense in the original budget includes an allowance for employee on - costs and benefits amounting to 30 per cent of the annual salaries. However, the introduction of a corporate-wide bonus program will increase this amount to 40 per cent in the fourth quarter.
- The original plan assumes a fixed hourly rate for travel and other related expenses for each billing hour of consulting. These are expenses that are not reimbursed by the client, and the previously determined hourly rate has proven to be adequate to cover these costs.
- Other revenue. derived from temporary rentals and interest, is expected to be the same in the fourth quarter as in each of the previous quarters.
- General and administrative expenses have been favourable at 7 per cent below the plan; this 7 per cent saving on fourth-quarter expenses will be reflected in the revised plan.
- Depreciation of office equipment and personal computers will stay constant at the projected straight-line rate.
Due to the favourable performance during the first three quarters and the division's increased ability to absorb costs, the corporate management at General Service Industries has increased the corporate expense allocated to the division by 50 per cent for the fourth quarter.
Required:
1. Prepare a revised operating budget for the fourth quarter for the Clark Services. This revised budget will be presented by Dick Smyth to General Service Industries.
2. What factors might cause an organisation to prepare a revised operating budget?