(Revising and analyzing an operating budget) The Mason Agency, a division of General Service Industries, offers consulting services to clients for a fee. The corporate management at General Service is pleased with the performance of the Mason Agency for the first nine months of the current year and has recommended that the division manager of the Mason Agency, Ramona Howell, submit a revised forecast for the remaining quarter, because the division has exceeded the annual year-to-date plan 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 is presented below.

2000 OPERATING BUDGET 1st 2nd 3rd Total Quarter Quarter Quarter 9 Months Revenue:

Consulting fees Management consulting $ 315,000 $ 315,000 $ 315,000 $ 945,000 EDP consulting 421,875 421,875 421,875 1,265,625 Total $ 736,875 $ 736,875 $ 736,875 $ 2,210,625 Other revenue 10,000 10,000 10,000 30,000 Total $ 746,875 $ 746,875 $ 746,875 $ 2,240,625 Expenses:

Consultant salaries $(386,750) $(386,750) $(386,750) $(1,160,250)

Travel and entertainment (45,625) (45,625) (45,625) (136,875)

Administrative (100,000) (100,000) (100,000) (300,000)

Depreciation (40,000) (40,000) (40,000) (120,000)

Corporate allocation (50,000) (50,000) (50,000) (150,000)

Total $(622,375) $(622,375) $(622,375) $(1,867,125)

Operating income $ 124,500 $ 124,500 $ 124,500 $ 373,500 When comparing the actuals for the first three quarters to the original plan, Howell analyzed the variances and will reflect the following information in her revised forecast for the fourth quarter.

The division currently has 25 consultants on staff, 10 for management consulting and 15 for EDP consulting, and has hired 3 additional management consultants to start work at the beginning of the fourth quarter to meet the increased client demand.

The hourly billing rate for consulting revenues will remain at $90 per hour for 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 by 50 hours per quarter. New employees are equally as capable as current employees and will be billed at the same rates.
The budgeted annual salaries and actual annual salaries, paid monthly, are the same at $50,000 for a management consultant and 8 percent less for an EDP consultant. Corporate management has approved a merit increase of 10 percent at the beginning of the fourth quarter for all 25 existing consultants, but the new consultants will be compensated at the planned rate.
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 programs will increase the fringe benefit allocation to 40 percent.
The original plan assumes a fixed hourly rate for travel and other related expenses for each billing hour of consulting. These are expenses that are not reimbursed by the client, and the previously determined hourly rate has proven to be adequate to cover these costs.
Other revenues are derived from temporary rentals and interest income and remain unchanged for the fourth quarter.
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.
Depreciation for office equipment and computers will stay constant at the projected straight-line rate.
Due to the 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.

a. Prepare a revised operating budget for the fourth quarter for the Mason Agency that Ramona Howell will present to General Service Industries. Be sure to furnish supporting calculations for all revised revenue and expense amounts.

b. Discuss the reasons why an organization would prepare a revised forecast.

c. Discuss your feelings about the 50 percent increase in corporate expense allocations.