Budgeting in Service Sector

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SERVICE SECTOR

The portion of the economy that produces intangible goods. According to the U.S. Census Bureau, the service sector primarily consists of truck transportation, messenger services and warehousing; information sector services; securities, commodities and other financial investment services; rental and leasing services; professional, scientific and technical services;

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Budgeting

… is the process of identifying, gathering, summarizing, and communicating

financial and nonfinancial information about an organization's future activities

• Is essential part of the continuous planning for an organization in order to accomplish long-term goals

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The Budgeting Process

• Budgets– Plans of action based on forecasted

transactions, activities, and events– Are synonymous with managing an

organization• Essential to accomplishing goals in the

strategic plan

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Long-Term Goals

… define the strategic direction an organization will take over

a five- to ten-year period

• Are the basis for – Making annual operating plans– Preparing budgets

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Short-Term Goals

• Involve every part of an enterprise• Much more detailed than long-term

goals• To formulate an annual operating plan,

long-term goals must be restated in terms of what needs to be accomplished during the next year

Short-term goals are the basis of an organization’s operating budgets for the year

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Budgeting and the Management Cycle

• Planning• Executing• Reporting• Reviewing

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The Master Budget

• Operating budgets– Plans used in daily operations– Basis for financial budgets

• Financial budgets– Projections of financial results for the accounting

period– Include

• Budgeted income statement• Capital expenditures budget• Cash budget• Budgeted balance sheet

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Preparation of a Master Budget for a Service Organization

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The Master Budget (cont’d)

• Sales budget– Is prepared first

• Used to estimate sales volume and revenues• Once developed, other budgets can be

developed– These other budgets will help manage the

organization's resources so that profits can be generated on sales

In a service organization, the sales budget is called the service revenue budget

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The Master Budget (cont’d)

• No standard format for budget preparation– Procedures vary from organization to

organization– Only universal requirement is that budgets

communicate the appropriate information to the reader in a clear and understandable manner

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Operating Budgets

… are a set of budgets that are used in planning the daily operations of an

organization

• Are part of the master budget

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Operating Budgets

• Procedures for preparing operating budgets include– Cost behavior analysis– Cost-volume-profit analysis– A product costing method

• Organizations that manufacture a variety of products or services may prepare– Separate operating budgets, or– One comprehensive budget for each product or

service

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Sales Budget

… is a detailed plan, expressed in both units and dollars, that identifies

the product (or service) sales expected in an accounting period

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Sales Budget (cont’d)

• Sales mangers use the information to– Plan sales- and marketing-related activities– Determine human, physical, and technical

resource needs• Accountants use the information to

– Determine estimated cash receipts for the cash budget

• To determine the total budgeted sales Total

Budgeted Sales

= Estimated

Selling Price per Unit

x Estimated Sales in Units

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The Direct Labor Budget

… is a detailed plan that estimates the direct labor hours needed in an accounting period

and the associated costs

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The Direct Labor Budget (cont’d)

• Production managers use estimated direct labor hours to plan – How many employees will be required during the period– The hours each employee will work

• Accountants use estimated direct labor costs to plan – For cash payments to workers

• Human resource managers use information on the direct labor budget to– Decide whether to hire new employees– Reduce the existing work force– Train employees– Prepare schedules of employee fringe benefits

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The Selling and Administrative Expense Budget

… is a detailed plan of operating expenses,

other than those related to production, that are needed to support sales

and overall operations in an accounting period

• Accountants use this budget to estimate cash payments for products or services used in nonproduction-related activities

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Financial Budgets

… are projections of financial results for an accounting period

• Include– Budgeted income statement– Capital expenditures budget– Cash budget– Budgeted balance sheet

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The Budgeted Income Statement

… projects an organization’s net income in an accounting period based on revenues and expenses

estimated for that period

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The Cash Budget

… is a projection of the cash an organization will receive

and the cash it will pay out in an accounting period

• Summarizes the cash flow prospects of all transactions considered in the master budget

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The Cash Budget (cont’d)

• Information it provides enables managers to plan for– Short-term loans when the cash balance is

low – Short-term investments when the cash

balance is high

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The Cash Budget (cont’d)

• Excludes some planned noncash transactions– Depreciation expense– Issuance and receipt of stock dividends– Uncollectible accounts expense– Gains and losses on sales of assets

• May also exclude– Deferred taxes– Accrued interest

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The Budgeted Balance Sheet

… projects an organization’s financial position

at the end of an accounting period

• Uses all estimated data compiled in the course of preparing a master budget– Is the final step in that process