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    Operating budget

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    TBA, a division of MLSC, offers management and computer consulting services to clients throughout Canada and the northwestern U.S. The division specialized in web site development and other internet applications. The corporate management at MLSC is pleased with the performance of TBA for the first nine months of the current year and has recommended that the division manager, Dick 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 increase in income. The original operating budget for the first three quarters for TBA is as follows:
    TBA 2001 Operating Budget

    1st Quarter 2nd Quarter 3rd Quarter Total First 3Quarters
    Comp. Cons. $421,874 $421,875 $421,875 $1,265,625
    Mgmt. Cons. $315,000 $315,000 $315,000 $ 945,000
    TOTAL Cons. $736,875 $736,875 $736,875 $2,210,625
    Other Revenue $ 10,000 $ 10,000 $ 10,000 $ 30,000
    Total Revenue $746,875 $746,875 $746,875 $2,240,625

    Cons. Salary $386,750 $386,750 $386,750 $1,160,250
    Travel $ 45,625 $ 45,625 $ 45,625 $ 136,875
    Gen. and Adm. $100,000 $100,000 $100,000 $ 300,000
    Depreciation $ 40,000 $ 40,000 $ 40,000 $ 120,000
    Corporate Alloc. $ 50,000 $ 50,000 $ 50,000 $ 150,000
    TOTAL Expenses $622,375 $622,375 $622,375 $1,867,125
    Operating Income $124,500 $124,500 $124,500 $ 373,500

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

    - TBA 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: $50,000 for a management consultant and $46,000 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 corporate-wide 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 division's increased ability to absorb costs, the corporate management at MLSC has increased the corporate expense allocation by 50 percent.

    1. Prepare a revised operating budget for the fourth quarter for TBA that Dick Howell can present to corporate management.

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    Solution Summary

    The solution explains how to prepare an operating budget