{"id":442,"date":"2015-10-08T21:19:51","date_gmt":"2015-10-08T21:19:51","guid":{"rendered":"https:\/\/courses.candelalearning.com\/managacct2x10xmaster\/?post_type=chapter&p=442"},"modified":"2016-01-01T14:04:17","modified_gmt":"2016-01-01T14:04:17","slug":"other-budgeting-methods","status":"publish","type":"chapter","link":"https:\/\/courses.lumenlearning.com\/suny-managacct\/chapter\/other-budgeting-methods\/","title":{"raw":"7.8 Other Budgeting Methods","rendered":"7.8 Other Budgeting Methods"},"content":{"raw":"

Budgeting in service companies<\/strong><\/h4>\r\n

The concepts discussed in this chapter are equally applicable to service companies. Service firms have service revenues and operating expenses that must be budgeted. Projected income statements and balance sheets can be prepared for service companies and are typically based on past performance.<\/p>\r\nhttps:\/\/youtu.be\/IuL0dWfd7Jk\r\n\r\nTo illustrate, assume Windy Weather Company wants to make the following changes this year to last year's results:\r\n

    \r\n\t
  1. Sales will increase 5%<\/li>\r\n\t
  2. Sales commissions will remain the same at 10% of sales<\/li>\r\n\t
  3. Sales and administrative salaries will increase 3%<\/li>\r\n\t
  4. Supplies, rent and miscellaneous expenses will remain the same.<\/li>\r\n\t
  5. Income taxes will be 30% of net income.<\/li>\r\n<\/ol>\r\nThe budgeted income statement for this year would be:\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n
    Windy Weather Company\u00a0\u00a0\u00a0\u00a0<\/strong><\/td>\r\n<\/tr>\r\n
    Budgeted Income Statement\u00a0\u00a0\u00a0<\/strong><\/td>\r\n<\/tr>\r\n
    \u00a0<\/strong><\/td>\r\nLast Year\r\n<\/strong><\/td>\r\nBUDGET\r\n<\/strong><\/td>\r\nCalculation<\/strong><\/span><\/em><\/td>\r\n<\/tr>\r\n
    Sales<\/td>\r\n$450,000<\/td>\r\n$472,500<\/td>\r\n450,000 + (450,000 x 5%)<\/span><\/em><\/td>\r\n<\/tr>\r\n
    Less Expenses:<\/td>\r\n<\/td>\r\n<\/td>\r\nheading only - no entry<\/span><\/em><\/td>\r\n<\/tr>\r\n
    \u00a0\u00a0 Sales Commissions<\/td>\r\n$45,000<\/td>\r\n$49,500<\/td>\r\n472,500 x 10%<\/span><\/em><\/td>\r\n<\/tr>\r\n
    \u00a0\u00a0 Sales Salaries<\/td>\r\n$50,000<\/td>\r\n$51,500<\/td>\r\n$50,000 + (50,000 x 3%)<\/span><\/em><\/td>\r\n<\/tr>\r\n
    \u00a0\u00a0 Administrative Salaries<\/td>\r\n$75,000<\/td>\r\n$77,250<\/td>\r\n$75,000 + (75,000 x 3%)<\/span><\/em><\/td>\r\n<\/tr>\r\n
    \u00a0\u00a0 Supplies Expense<\/td>\r\n$5,000<\/td>\r\n$5,000<\/td>\r\nno change<\/span><\/em><\/td>\r\n<\/tr>\r\n
    \u00a0\u00a0 Rent Expense<\/td>\r\n$120,000<\/td>\r\n$120,000<\/td>\r\nno change<\/span><\/em><\/td>\r\n<\/tr>\r\n
    \u00a0\u00a0 Miscellaneous Expense<\/td>\r\n$15,000<\/span><\/td>\r\n$15,000<\/span><\/td>\r\nno change<\/span><\/em><\/td>\r\n<\/tr>\r\n
    Total Expenses<\/td>\r\n$310,000<\/span><\/td>\r\n$318,250<\/span><\/td>\r\nsum of all expenses<\/span><\/em><\/td>\r\n<\/tr>\r\n
    Income from operations<\/td>\r\n$140,000<\/td>\r\n$154,250<\/td>\r\nSales 450,000 - Expenses 318,250<\/span><\/em><\/td>\r\n<\/tr>\r\n
    Less: Income Tax (30%)<\/td>\r\n($42,000)<\/span><\/td>\r\n($46,275)<\/span><\/td>\r\nInc. from operations x 30%<\/span><\/em><\/td>\r\n<\/tr>\r\n
    Net Income<\/strong><\/td>\r\n$98,000<\/strong><\/td>\r\n$107,975<\/strong><\/td>\r\nInc. from operations - income tax<\/span><\/em><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n

    Zero-Based Budgeting<\/h4>\r\nAn alternative to the traditional budget is zero-based budgeting.\r\n\r\nhttps:\/\/youtu.be\/t0KLvsvShsk\r\n\r\nZero-base budgeting became popular in the 1970s, particularly when President Jimmy Carter supported it for state and federal governmental units. It has received less attention since then.\r\n

    Under zero-base budgeting<\/span><\/strong>, managers in a company start each year with zero budget levels and must justify every dollar that appears in the budget. Managers do not assume any costs incurred in previous years should be incurred this year. Each manager prepares decision packages that describe the nature and cost of tasks that can be performed by that unit and the consequences of not performing each task. Top organization officials rank the decision packages and approve those that they believe are most worthy. A major drawback to the use of this concept is the massive amounts of paperwork and time needed to prepare and rank decision packages, especially in large organizations.<\/p>\r\n\r\n

    Accounting in the Headlines<\/h4>\r\n

    Why is Campbell Soup Company using zero-based\u00a0budgeting?<\/h1>\r\n

    \"photo<\/a>Consumers are increasingly distrusting \u201cBig Food,\u201d and Campbell Soup Company (CPB) is working to counter the effects of that trend by offering more healthy or natural alternatives.\u00a0 For example, Campbell\u2019s recently introduced a new line of organic soups, Campbell\u2019s\u00ae Organics, and acquired both Bolthouse Farms juices and Plum Organics baby food.<\/p>\r\n\r\n

    \r\n\r\nIn addition to expanding its healthier and more natural product lines, Campbell\u2019s has also announced it will be implementing zero-based budgeting.\u00a0 It expects to save $200 million off its expected annual costs of close to $7 billion.\r\n\r\nQuestions<\/strong>\r\n
      \r\n\t
    1. What is \u201czero-based budgeting\u201d?<\/li>\r\n\t
    2. How does Campbell\u2019s expect that it will save $200 million by using zero-based budgeting?<\/li>\r\n\t
    3. What are some potential drawbacks to Campbell\u2019s from its use of zero-based budgeting?<\/li>\r\n<\/ol>\r\nFinal Thoughts<\/strong>\r\n\r\nFor the final thoughts on budgeting, it might be helpful to rethink about how we create budgets, who creates them and what motivation the person might have for the budget figures.\u00a0 This video discusses the difference between participating and traditional budgeting.\r\n\r\nhttps:\/\/youtu.be\/m-uWeIy-whQ\r\n\r\n \r\n\r\n<\/div>","rendered":"

      Budgeting in service companies<\/strong><\/h4>\n

      The concepts discussed in this chapter are equally applicable to service companies. Service firms have service revenues and operating expenses that must be budgeted. Projected income statements and balance sheets can be prepared for service companies and are typically based on past performance.<\/p>\n