PR 9-41 (Algo) Revised Operating Budget; Consulting Firm (LO 9-2, 9-5, 9-7)

Toronto Business Associates, a division of Maple Leaf Services Corporation, offers management and computer consulting services to clients throughout Canada and the northwestern United States. The division specializes in website development and other Internet applications. The corporate management at Maple Leaf Services is pleased with the performance of Toronto Business Associates for the first nine months of the current year and has recommended that the division manager, Richard Wu, 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 increase in income. The original operating budget for the first three quarters for Toronto Business Associates follows.

TORONTO BUSINESS ASSOCIATES
20x1 Operating Budget
	1st Quarter	2nd Quarter	3rd Quarter	Total for First Three Quarters
Revenue:
Consulting fees:
Computer system consulting	$ 480,375	$ 480,375	$ 480,375	$ 1,441,125
Management consulting	373,500	373,500	373,500	1,120,500
Total consulting fees	$ 853,875	$ 853,875	$ 853,875	$ 2,561,625
Other revenue	29,500	29,500	29,500	88,500
Total revenue	$ 883,375	$ 883,375	$ 883,375	$ 2,650,125
Expenses:
Consultant salary expenses	$ 492,375	$ 492,375	$ 492,375	$ 1,477,125
Travel and related expenses	52,775	52,775	52,775	158,325
General and administrative expenses	106,500	106,500	106,500	319,500
Depreciation expense	46,500	46,500	46,500	139,500
Corporate expense allocation	56,500	56,500	56,500	169,500
Total expenses	$ 754,650	$ 754,650	$ 754,650	$ 2,263,950
Operating income	$ 128,725	$ 128,725	$ 128,725	$ 386,175

Wu will reflect the following information in his revised forecast for the fourth quarter.

• Toronto Business Associates currently has 25 consultants on staff, 10 for management consulting and 15 for computer systems consulting. Three additional management consultants have been hired to start work at the beginning of the fourth quarter in order to meet the increased client demand.
• The hourly billing rate for consulting revenue will remain at $90 per hour for each management consultant and $75 per hour for each computer 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.
• The budgeted annual salaries and actual annual salaries, paid monthly, are the same: $63,000 for a management consultant and $59,000 for a computer consultant. Corporate management has approved a merit increase of 10 percent at the beginning of the fourth quarter for all 25 existing consultants, while 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 benefits 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 revenue is derived from temporary rentals and interest income and remains unchanged for the fourth quarter.
• 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.
• Depreciation of office equipment and personal computers will stay constant at the projected straight-line rate.
• Due to the favorable experience for the first three quarters and the divisions increased ability to absorb costs, the corporate management at Maple Leaf Services has increased the corporate expense allocation by 50 percent.

Required:

1. Prepare a revised operating budget for the fourth quarter for Toronto Business Associates that Richard Wu will present to corporate management.
2. Which of the following circumstances would NOT require an organization to prepare a revised operating budget?