This unit has focused on manufacturing companies; however, many companies are service

operations that do not sell a physical product. For this portfolio assignment, select a for profit
service company and describe the process it would use to create a master budget. How would the
budget process for the service company differ from a manufacturing company? Be specific.
As portfolio activities are to be self-reflective, please make sure to connect the portfolio
assignment to:

 Personal experiences. Reflect on how this assignment topic is applicable to and will benefit
you.
 Course readings and any external readings.
 Discussion forum posts or other course objectives.

Service organizations like law firms or academic universities when compared to manufacturing or
merchandising companies don't have overhead costs such as raw materials, direct labour,
manufacturing overhead, or merchandise inventory. What they have rather are revenue from and
cost of services. So, for budgeting purposes, items being projected are the revenue coming from
those services and as to the cost, it would be the labour cost paid in order to meet those projected
services to clients. Since it is non-product, usually the rate applied for a certain service is based on
marked up labour cost.

When budgeting, consider the rate multiply that with the service to be rendered. Or for some
companies, it depends on the contract agreed upon. For example, if firm rendering financial
assurance, the duration may take some time until they produce the final results which are the
audited financial statements. So, what you need to budget there would be the estimated time to
be spent by your auditors in performing their tasks including their hotel stay or when they visit to
the client or OT hours, to name a few. 

The steps being followed by the company in creating a master budget are as follows:

-Estimating the sales revenue to arrive at the initial sales budget. -Arranging the order of creating a
master budget.

-Developing a production, direct expenses, and ending merchandise budget.

-Preparation of the budget of the expenses that is not directly associated with the services along
with the cash budget.

-Preparation of the financials based on estimates. 

The differences in the budgeting plans of service and manufacturing companies are as follows:

*The service companies do not have physical inventories whereas manufacturing companies deal
with physical merchandise. Therefore, the development of production budget and calculation of
ending merchandise balance is irrelevant for the service companies and therefore this step is
excluded.
*The sales budget prepared in the service companies provides the base for the expenses to be
incurred whereas in manufacturing companies, expenses are based highly on the production units
that are calculated while making a production budget.

The best part about this section was the knowing the difference between the two set of
companies and their budget process i.e. manufacturing and service organizations.

Pietrzak, Ż. (2013). Traditional versus activity-based budgeting in non-manufacturing

companies. Social Sciences, 82(4), 26-37.
Shim, J. K., Siegel, J. G., & Shim, A. I. (2011). Budgeting basics and beyond (Vol. 574). John Wiley &
Sons.