The document discusses budgeting in the service sector. It defines key terms like the service sector, budgeting, and the budgeting process. It then describes the steps involved in preparing a master budget for a service organization, including operating budgets like the sales/service revenue budget, direct labor budget, and selling/administrative expense budget. It also discusses financial budgets like the budgeted income statement, cash budget, and budgeted balance sheet that are included as part of the master budget. The master budget is an integrated set of budgets that allows management to plan and control operations for the upcoming period.

1. Budgeting in Service Sector

2. 21–2
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;

3. 21–3
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

4. 21–4
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

5. 21–5
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

6. 21–6
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

7. 21–7
Budgeting and the Management Cycle
• Planning
• Executing
• Reporting
• Reviewing

8. 21–8
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

9. 21–9
Preparation of a Master Budget for a Service
Organization

10. 21–10
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

11. 21–11
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

12. 21–12
Operating Budgets
… are a set of budgets that are used in
planning the daily operations of an
organization
• Are part of the master budget

13. 21–13
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

14. 21–14
Sales Budget
… is a detailed plan,
expressed in both units and dollars,
that identifies
the product (or service) sales
expected in an accounting period

15. 21–15
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

16. 21–16
The Direct Labor Budget
… is a detailed plan that estimates
the direct labor hours needed
in an accounting period
and the associated costs

17. 21–17
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

18. 21–18
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

19. 21–19
Financial Budgets
… are projections of financial results
for an accounting period
• Include
– Budgeted income statement
– Capital expenditures budget
– Cash budget
– Budgeted balance sheet

20. 21–20
The Budgeted Income Statement
… projects an organization’s net income
in an accounting period
based on revenues and expenses
estimated for that period

21. 21–21
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

22. 21–22
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

23. 21–23
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

24. 21–24
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