{"id":1080,"date":"2021-04-14T00:40:29","date_gmt":"2021-04-14T00:40:29","guid":{"rendered":"https:\/\/courses.lumenlearning.com\/wm-managerialaccounting\/?post_type=chapter&#038;p=1080"},"modified":"2021-08-05T02:32:47","modified_gmt":"2021-08-05T02:32:47","slug":"operating-budget-service","status":"publish","type":"chapter","link":"https:\/\/courses.lumenlearning.com\/wm-managerialaccounting\/chapter\/operating-budget-service\/","title":{"raw":"Operating Budget - Service","rendered":"Operating Budget &#8211; Service"},"content":{"raw":"<div class=\"textbox learning-objectives\">\r\n<h3>Learning Outcomes<\/h3>\r\n<ul>\r\n \t<li>Prepare an operating budget for a service company<\/li>\r\n<\/ul>\r\n<\/div>\r\n<img class=\"aligncenter wp-image-1456 size-full\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5469\/2021\/04\/07235729\/Screen-Shot-2021-05-07-at-4.54.52-PM.png\" alt=\"Service Company Budgets flowchart. At the top is the sales budget, which has an arrow pointing to the SG&amp;A budget. The sales and SG&amp;A budget boxes are blue and there is a bracket labeling those as the operating budget. Below the operating budget is a horizontal line showing the capital expenditures budget in red on the left, and going to the right from there, an arrow pointing to the cash budget, with another arrow pointing to the budgeted income statement, and a final arrow pointing to the budgeted balance sheet. The cash budget, budgeted income statement, and budgeted balance sheet are all green and there is a bracket labeling those as the financial budget. There is also an arrow pointing from the SG&amp;A budget to the cash budget.\" width=\"739\" height=\"457\" \/>\r\n\r\nService firms use the same budgeting process as other firms, but it\u2019s usually simpler since there is no product for which to account. Often, a service company that has steady, predictable business will adopt an incremental approach to budgeting, basing next year\u2019s budget off the current year.\r\n\r\nTo illustrate, assume Wendy Weathers\u2019s accounting firm projects the following changes to last year\u2019s results:\r\n<ol>\r\n \t<li style=\"font-weight: 400;\" aria-level=\"1\">Business volume will increase by 5%.<\/li>\r\n \t<li style=\"font-weight: 400;\" aria-level=\"1\">Support staff salaries will increase 3% and so will taxes and benefits.<\/li>\r\n \t<li style=\"font-weight: 400;\" aria-level=\"1\">Rent will go up by $3,150 according to the lease agreement.<\/li>\r\n \t<li style=\"font-weight: 400;\" aria-level=\"1\">Other expenses will remain the same.<\/li>\r\n \t<li style=\"font-weight: 400;\" aria-level=\"1\">Income taxes will be 30% of net income.<\/li>\r\n<\/ol>\r\n<div align=\"left\">\r\n<table class=\"fin-table acctstatement fw\"><caption>Wendy Weathers Company<\/caption>\r\n<thead>\r\n<tr class=\"u-sr-only\">\r\n<th scope=\"col\">Description<\/th>\r\n<th scope=\"col\">Prior Year<\/th>\r\n<th scope=\"col\">BUDGET<\/th>\r\n<th scope=\"col\">Calculation<\/th>\r\n<\/tr>\r\n<\/thead>\r\n<tbody>\r\n<tr>\r\n<td colspan=\"4\"><span class=\"u-sr-only\">Subcategory, <\/span><strong>Budget<\/strong><\/td>\r\n<\/tr>\r\n<tr>\r\n<td><\/td>\r\n<td class=\"r line-double\">Prior Year<span class=\"u-sr-only\">Double line<\/span><\/td>\r\n<td class=\"r line-double\">BUDGET<span class=\"u-sr-only\">Double line<\/span><\/td>\r\n<td class=\"line-double\">Calculation<span class=\"u-sr-only\">Double line<\/span><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Sales<\/td>\r\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>$450,000<\/td>\r\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>$472,500<\/td>\r\n<td>450,000 * 1.05<\/td>\r\n<\/tr>\r\n<tr>\r\n<td colspan=\"1\"><span class=\"u-sr-only\">Subcategory, <\/span><strong>Less Expenses:<\/strong><\/td>\r\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span><\/td>\r\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span><\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Support Salaries<\/td>\r\n<td class=\"r\">$125,000<\/td>\r\n<td class=\"r\">$128,750<\/td>\r\n<td>$125,000 *1.03<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Payroll Taxes and Benefits<\/td>\r\n<td class=\"r\">$45,000<\/td>\r\n<td class=\"r\">$46,350<\/td>\r\n<td>$75,000 * 1.03<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Supplies Expense<\/td>\r\n<td class=\"r\">$5,000<\/td>\r\n<td class=\"r\">$5,000<\/td>\r\n<td>no change<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Rent Expense<\/td>\r\n<td class=\"r\">$120,000<\/td>\r\n<td class=\"r\">$123,150<\/td>\r\n<td>Rent increase<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Miscellaneous Expense<\/td>\r\n<td class=\"r\">$15,000<\/td>\r\n<td class=\"r\">$15,000<\/td>\r\n<td>no change<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Total Expenses<\/td>\r\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>$310,000<\/td>\r\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>$318,250<\/td>\r\n<td>sum of all expenses<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Income from operations<\/td>\r\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>$140,000<\/td>\r\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>$154,250<\/td>\r\n<td>Sales \u2013 Expenses<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Less: Income Tax (30%)<\/td>\r\n<td class=\"r\">($42,000)<\/td>\r\n<td class=\"r\">($46,275)<\/td>\r\n<td>Inc. from operations x 30%<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Projected Profit<\/td>\r\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>$98,000<\/td>\r\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>$107,975<\/td>\r\n<td>Inc. from operations \u2013 income tax<\/td>\r\n<\/tr>\r\n<tr>\r\n<td><\/td>\r\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span><\/td>\r\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span><\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n<\/div>\r\n&nbsp;\r\n\r\nShe could also use zero-based budgeting by projecting the volume of work she expects and assigning revenue to that volume. For instance, if she intends to increase her fees from $225\/hour to $250 and wants to limit her billable hours per week to 40, taking two weeks off, she would forecast revenue as 50 weeks * 40 hours\/week * $250\/hr =\u00a0 $500,000.\r\n\r\nIn addition, she may want to create the budget on a monthly basis, since workloads for an accounting firm may be heavier during tax season and lighter during the summer, depending on the kind of work the firm is doing.\r\n\r\nNow check your understanding of the operating budget for a service company.\r\n<div class=\"textbox tryit\">\r\n<h3>Practice Question<\/h3>\r\n[ohm_question hide_question_numbers=1]220604[\/ohm_question]\r\n\r\n<\/div>","rendered":"<div class=\"textbox learning-objectives\">\n<h3>Learning Outcomes<\/h3>\n<ul>\n<li>Prepare an operating budget for a service company<\/li>\n<\/ul>\n<\/div>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"aligncenter wp-image-1456 size-full\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5469\/2021\/04\/07235729\/Screen-Shot-2021-05-07-at-4.54.52-PM.png\" alt=\"Service Company Budgets flowchart. At the top is the sales budget, which has an arrow pointing to the SG&amp;A budget. The sales and SG&amp;A budget boxes are blue and there is a bracket labeling those as the operating budget. Below the operating budget is a horizontal line showing the capital expenditures budget in red on the left, and going to the right from there, an arrow pointing to the cash budget, with another arrow pointing to the budgeted income statement, and a final arrow pointing to the budgeted balance sheet. The cash budget, budgeted income statement, and budgeted balance sheet are all green and there is a bracket labeling those as the financial budget. There is also an arrow pointing from the SG&amp;A budget to the cash budget.\" width=\"739\" height=\"457\" \/><\/p>\n<p>Service firms use the same budgeting process as other firms, but it\u2019s usually simpler since there is no product for which to account. Often, a service company that has steady, predictable business will adopt an incremental approach to budgeting, basing next year\u2019s budget off the current year.<\/p>\n<p>To illustrate, assume Wendy Weathers\u2019s accounting firm projects the following changes to last year\u2019s results:<\/p>\n<ol>\n<li style=\"font-weight: 400;\" aria-level=\"1\">Business volume will increase by 5%.<\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\">Support staff salaries will increase 3% and so will taxes and benefits.<\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\">Rent will go up by $3,150 according to the lease agreement.<\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\">Other expenses will remain the same.<\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\">Income taxes will be 30% of net income.<\/li>\n<\/ol>\n<div style=\"text-align: left;\">\n<table class=\"fin-table acctstatement fw\">\n<caption>Wendy Weathers Company<\/caption>\n<thead>\n<tr class=\"u-sr-only\">\n<th scope=\"col\">Description<\/th>\n<th scope=\"col\">Prior Year<\/th>\n<th scope=\"col\">BUDGET<\/th>\n<th scope=\"col\">Calculation<\/th>\n<\/tr>\n<\/thead>\n<tbody>\n<tr>\n<td colspan=\"4\"><span class=\"u-sr-only\">Subcategory, <\/span><strong>Budget<\/strong><\/td>\n<\/tr>\n<tr>\n<td><\/td>\n<td class=\"r line-double\">Prior Year<span class=\"u-sr-only\">Double line<\/span><\/td>\n<td class=\"r line-double\">BUDGET<span class=\"u-sr-only\">Double line<\/span><\/td>\n<td class=\"line-double\">Calculation<span class=\"u-sr-only\">Double line<\/span><\/td>\n<\/tr>\n<tr>\n<td>Sales<\/td>\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>$450,000<\/td>\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>$472,500<\/td>\n<td>450,000 * 1.05<\/td>\n<\/tr>\n<tr>\n<td colspan=\"1\"><span class=\"u-sr-only\">Subcategory, <\/span><strong>Less Expenses:<\/strong><\/td>\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span><\/td>\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span><\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Support Salaries<\/td>\n<td class=\"r\">$125,000<\/td>\n<td class=\"r\">$128,750<\/td>\n<td>$125,000 *1.03<\/td>\n<\/tr>\n<tr>\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Payroll Taxes and Benefits<\/td>\n<td class=\"r\">$45,000<\/td>\n<td class=\"r\">$46,350<\/td>\n<td>$75,000 * 1.03<\/td>\n<\/tr>\n<tr>\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Supplies Expense<\/td>\n<td class=\"r\">$5,000<\/td>\n<td class=\"r\">$5,000<\/td>\n<td>no change<\/td>\n<\/tr>\n<tr>\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Rent Expense<\/td>\n<td class=\"r\">$120,000<\/td>\n<td class=\"r\">$123,150<\/td>\n<td>Rent increase<\/td>\n<\/tr>\n<tr>\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Miscellaneous Expense<\/td>\n<td class=\"r\">$15,000<\/td>\n<td class=\"r\">$15,000<\/td>\n<td>no change<\/td>\n<\/tr>\n<tr>\n<td>Total Expenses<\/td>\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>$310,000<\/td>\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>$318,250<\/td>\n<td>sum of all expenses<\/td>\n<\/tr>\n<tr>\n<td>Income from operations<\/td>\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>$140,000<\/td>\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>$154,250<\/td>\n<td>Sales \u2013 Expenses<\/td>\n<\/tr>\n<tr>\n<td>Less: Income Tax (30%)<\/td>\n<td class=\"r\">($42,000)<\/td>\n<td class=\"r\">($46,275)<\/td>\n<td>Inc. from operations x 30%<\/td>\n<\/tr>\n<tr>\n<td>Projected Profit<\/td>\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>$98,000<\/td>\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>$107,975<\/td>\n<td>Inc. from operations \u2013 income tax<\/td>\n<\/tr>\n<tr>\n<td><\/td>\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span><\/td>\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span><\/td>\n<td><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/div>\n<p>&nbsp;<\/p>\n<p>She could also use zero-based budgeting by projecting the volume of work she expects and assigning revenue to that volume. For instance, if she intends to increase her fees from $225\/hour to $250 and wants to limit her billable hours per week to 40, taking two weeks off, she would forecast revenue as 50 weeks * 40 hours\/week * $250\/hr =\u00a0 $500,000.<\/p>\n<p>In addition, she may want to create the budget on a monthly basis, since workloads for an accounting firm may be heavier during tax season and lighter during the summer, depending on the kind of work the firm is doing.<\/p>\n<p>Now check your understanding of the operating budget for a service company.<\/p>\n<div class=\"textbox tryit\">\n<h3>Practice Question<\/h3>\n<p><iframe loading=\"lazy\" id=\"ohm220604\" class=\"resizable\" src=\"https:\/\/ohm.lumenlearning.com\/multiembedq.php?id=220604&theme=oea&iframe_resize_id=ohm220604\" width=\"100%\" height=\"150\"><\/iframe><\/p>\n<\/div>\n\n\t\t\t <section class=\"citations-section\" role=\"contentinfo\">\n\t\t\t <h3>Candela Citations<\/h3>\n\t\t\t\t\t <div>\n\t\t\t\t\t\t <div id=\"citation-list-1080\">\n\t\t\t\t\t\t\t <div class=\"licensing\"><div class=\"license-attribution-dropdown-subheading\">CC licensed content, Original<\/div><ul class=\"citation-list\"><li>Operating Budget. <strong>Authored by<\/strong>: Joseph Cooke. <strong>Provided by<\/strong>: Lumen Learning. <strong>License<\/strong>: <em><a target=\"_blank\" rel=\"license\" href=\"https:\/\/creativecommons.org\/licenses\/by\/4.0\/\">CC BY: Attribution<\/a><\/em><\/li><\/ul><div class=\"license-attribution-dropdown-subheading\">CC licensed content, Shared previously<\/div><ul class=\"citation-list\"><li>Accounting Principles: A Business Perspective. <strong>Authored by<\/strong>: James Don Edwards, University of Georgia &amp; Roger H. Hermanson, Georgia State University. <strong>Provided by<\/strong>: Endeavour International Corporation. <strong>Project<\/strong>: The Global Text Project. <strong>License<\/strong>: <em><a target=\"_blank\" rel=\"license\" href=\"https:\/\/creativecommons.org\/licenses\/by\/4.0\/\">CC BY: Attribution<\/a><\/em><\/li><\/ul><\/div>\n\t\t\t\t\t\t <\/div>\n\t\t\t\t\t <\/div>\n\t\t\t <\/section>","protected":false},"author":364389,"menu_order":16,"template":"","meta":{"_candela_citation":"[{\"type\":\"original\",\"description\":\"Operating Budget\",\"author\":\"Joseph Cooke\",\"organization\":\"Lumen Learning\",\"url\":\"\",\"project\":\"\",\"license\":\"cc-by\",\"license_terms\":\"\"},{\"type\":\"cc\",\"description\":\"Accounting Principles: A Business Perspective\",\"author\":\"James Don Edwards, University of Georgia & Roger H. Hermanson, Georgia State University\",\"organization\":\"Endeavour International Corporation\",\"url\":\"\",\"project\":\"The Global Text Project\",\"license\":\"cc-by\",\"license_terms\":\"\"}]","CANDELA_OUTCOMES_GUID":"","pb_show_title":"on","pb_short_title":"","pb_subtitle":"","pb_authors":[],"pb_section_license":""},"chapter-type":[],"contributor":[],"license":[],"class_list":["post-1080","chapter","type-chapter","status-publish","hentry"],"part":33,"_links":{"self":[{"href":"https:\/\/courses.lumenlearning.com\/wm-managerialaccounting\/wp-json\/pressbooks\/v2\/chapters\/1080","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/courses.lumenlearning.com\/wm-managerialaccounting\/wp-json\/pressbooks\/v2\/chapters"}],"about":[{"href":"https:\/\/courses.lumenlearning.com\/wm-managerialaccounting\/wp-json\/wp\/v2\/types\/chapter"}],"author":[{"embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/wm-managerialaccounting\/wp-json\/wp\/v2\/users\/364389"}],"version-history":[{"count":8,"href":"https:\/\/courses.lumenlearning.com\/wm-managerialaccounting\/wp-json\/pressbooks\/v2\/chapters\/1080\/revisions"}],"predecessor-version":[{"id":2508,"href":"https:\/\/courses.lumenlearning.com\/wm-managerialaccounting\/wp-json\/pressbooks\/v2\/chapters\/1080\/revisions\/2508"}],"part":[{"href":"https:\/\/courses.lumenlearning.com\/wm-managerialaccounting\/wp-json\/pressbooks\/v2\/parts\/33"}],"metadata":[{"href":"https:\/\/courses.lumenlearning.com\/wm-managerialaccounting\/wp-json\/pressbooks\/v2\/chapters\/1080\/metadata\/"}],"wp:attachment":[{"href":"https:\/\/courses.lumenlearning.com\/wm-managerialaccounting\/wp-json\/wp\/v2\/media?parent=1080"}],"wp:term":[{"taxonomy":"chapter-type","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/wm-managerialaccounting\/wp-json\/pressbooks\/v2\/chapter-type?post=1080"},{"taxonomy":"contributor","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/wm-managerialaccounting\/wp-json\/wp\/v2\/contributor?post=1080"},{"taxonomy":"license","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/wm-managerialaccounting\/wp-json\/wp\/v2\/license?post=1080"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}