(Preparing and analyzing a budget) Harvey & Company, a local accounting firm, has a formal budgeting system. The firm is comprised of five partners, two managers, four seniors, two secretaries, and two bookkeepers. The budgeting process has a bottom-line focus; i.e., the budget and planning process continues to iterate and evolve until an acceptable budgeted net income is obtained. The determination of an acceptable level of net income is based on two factors: (1) the amount of salary the partners could generate if they were employed elsewhere, and (2) a reasonable return on the partners’ investment in the firm’s net assets.

For 1998, after careful consideration of alternative employment opportu¬ nities, the partners agreed that the best alternative employment would generate the following salaries:

The second input to determination of the desired net income level is more complex. This part ol the desired net income is based on the value of the net assets owned by the accounting firm. The partners have identified two major categories of assets: tangible assets and intangible assets. The partners have agreed that the net tangible assets are worth $230,000. The intangible assets, consisting mostly of the accounting practice itself, are worth 1.1 times gross fees billed in 1997. In 1997, the firm’s gross billings were $1,615,000. The partners have also agreed that a reasonable rate of return on the net assets of the ac¬ counting firm is 12 percent. Thus, the partners’ desired net income from return on investment is as follows:

a. Determine the minimum level of gross billings that would allow the partners to realize their net income objective. Prepare a budget of costs and revenues at that level.

b. If the partners believe that the level of billings you have projected in part a is not feasible given the time constraints at the partner, manager, and senior levels, what changes can they make to the budget to preserve the desired level of net income?LO1

Transcribed Image Text:

Partner 1 $150,000 Partner 2 Partner 3 225,000 110,000 Partner 4 Partner 5 90,000 125,000 Total $700,000