Exercise on Budgeting and Standard Costing - Service Industry

Exercise 1: Preparation of Cash Budget The Citizen Health Club is one of the old clubs in the city. In a regular meeting of the Board of Governors, the future of the club was discussed and most of them have expressed the need to increase the facilities. The Board decided to invest additional expenditure of Rs. 10 lakhs each year for the next few years and also want to establish a fund to acquire property worth of Rs. 120 lakhs at the end of three year. The club's Treasurer however felt that it may not be possible to achieve this ambitious plan given the current financial performance of the club. The Board has asked the Treasurer to prepare a cash budget to find out the feasibility of the expansion program. The Income & Expenditure Statement of the club for the last two years are given below: Citizen Health Club Statement of Income and Expenditure for the year ended 31st March, 20XX (Rs. in thousands)
Year -2 Cash Revenue Annual Membership Fee Training Fee Less: Training Cost Exhibition and other events Other Income Total Income Expenses Salary and Wages Supplies Electricity and other expenses Interest Miscellaneous Total Expense Net Income 21300 14040 9600 4440 3000 1200 29940 10800 7385 Year - 1 18000 3415 2400 900 24715

20880 1728 1584 2520 144 26856 3084

17600 1408 960 2432 96 22496 2219

The Treasurer collected the following additional information from financial records to prepare the cash budget. 1. Balances at the end of year 2: Cash in Bank Account Petty cash Outstanding Loan Accounts Payable Rs. 3 lakhs Rs. 10,000 Rs. 120 lakhs Rs. 1.20 lakhs

2. The club purchased new equipment worth of Rs. 10 lakhs during the current year and paid 50% at the time of purchase. The balance has to be paid within another one month. 3. The outstanding loan represents a loan taken from housing finance company to purchase the new building for the club last year. As per the terms of the loan, the loan has to be repaid at the rate of Rs. 40 lakhs per year with an interest cost at 12% per year on outstanding. 4. Membership growth rate is observed at 5% and it is expected to continue. The club has no plan to change the membership fee. 5. The growth in training fee will be maintained but the cost of training is expected to increase. However, the club is confident that it will suitably increase the fee to meet this additional expense and hence the profit margin achieved in year 2 will be maintained. 6. Miscellaneous income is expected to grow at the same rate achieved in the last year. 7. Expenses are expected to go up by the following rates: Salary and Wages (20%), Electricity and other expenses (10%); Supplies (5%). Required 1. Prepare a cash budget for the next year. 2. Is it feasible to achieve the expansion plan and also provide for the fund to acquire the property at the end of three years?

Exercise 2: Budget Revision The Mascon Agency, a division of General Service Industries offers consulting services to clients for a fee. The corporate management of General Service is pleased with the performance of the Mason Agency for the first nine months of the current year. It has also recommended that the division manager of the Mason Agency, Richard Howell, submit a revised forecast for the remaining quarter, as the division has exceeded the annual plan year-to-date by 20 percent of operating income. An unexpected increase in billed hour volume over the original plan is the main reason for this gain in income. The original operating budget for the first three quarters for the Mason Agency follows: The Mason Agency 20x0-1 Operating Budget First Quarter Revenue Consulting Fees Management Consulting EDP Consulting Total Consulting Fees Other Revenue Total Revenue Expenses Consultants Salary Travel General Admin. Depreciation Corporate Allocation Total Expenses Operating Income Second Quarter 315000 421875 736875 10000 746875 386750 45625 100000 40000 50000 622375 124500 (Figures in $) Third Total Nine Quarter Month 315000 421875 736875 10000 746875 386750 45625 100000 40000 50000 622375 124500
945000 1265625 2210625 30000 2240625 0 1160250 136875 300000 120000 150000 1867125 373500

315000 421875 736875 10000 746875 386750 45625 100000 40000 50000 622375 124500

When comparing the actual for the first three quarters to the original plan, Howell analyzed the variances and will reflect the following information in his revised forecast for the fourth quarter. 1. The division currently has 25 consultants on staff, 10 for management consulting and 15 for EDP consulting, and has hired three additional management consultants to start work at the beginning of the fourth quarter in order to meet the increased client demand. 2. The hourly billing rate for consulting revenues is market acceptable and will remain at $90 per hour of each management consultant and $75 per hour for each EDP consultant. However, due to the favorable increase in billing hour volume when

compared to the plan, the hours for each consultant will be increased 50 hours per quarter. There is no learning curve for billable consulting hours for new employees. 3. The budgeted annual salaries and actual annual salaries paid monthly are the same at $50000 for management consultants and 8% less for EDP consultants. Corporate Management has approved a merit increase of 10 percent at the beginning of the fourth quarter to all 25 existing consultants, while the new consultants will be compensated at the planned rate. 4. The planned salary expense includes a provision for employee fringe benefits amounting to 30 percent of the annual salaries. However, the improvement of some corporatewide employee program will increase the fringe benefit allocation to 40 percent. 5. The original plan assumes a fixed hourly rate for travel and other related expenses for each billing hours of consulting. These are expenses that are not reimbursed by the client, an previously determined hourly rate has proved to be adequate to cover these costs. 6. Other revenues are derived from temporary rental and interest income and remain unchanged for the fourth quarter. 7. General and Administrative expenses have been favorable at 7 percent below the plan. This 7 percent savings on fourth-quarter expenses will be reflected in the revised plan. 8. Depreciation for office equipment and microcomputers will stay consistent at the projected straight-line rate. 9. Due to favorable experience for 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 allocation by 50 percent. Required 1. Prepare a revised operating budget for the fourth quarter for the Mason Agency that Richard Howell will present to the General Service Industries. 2. Discuss the reasons why an organization would prepare a revised budget. (CMA Adapted)

Exercise 3: Analysis of Variance Integrated Software Solution Company has completed three major projects during the year. The budget and actual data relating to the projects are as follows: Project 1 Budget Consultant Hours Consultants Salary Computer Hours # Travel Overhead @100 per hour 5000 600,000 4000 520,000 500,000 Actual 5800 820,000 4200 740,000 580,000 Project 2 Budget 2000 250,000 1800 120,000 200,000 Actual 2200 260,000 1700 110,000 220,000 Project 3 Budget 12000 1500000 8500 300,000 1200,000 Actual 14000 1800000 11200 420,000 1400,000

# Standard computer charge per hour is Rs. 200. The company has quoted for each of the job at Rs. 500 per hour (standard hour) and invoiced accordingly. Required Find the variance in the budgeted profit and actual profit and also explain the variance under different headings.