PROBLEM 9-20 Evaluating a Company\'s Budget Procedures LO9-1 Springfield Corpora

Question

PROBLEM 9-20 Evaluating a Company's Budget Procedures LO9-1 Springfield Corporation operates on a calendar-year basis. It begins the annual budgeting process in late August, when the president establishes targets for total sales dollars and net operating income before taxes for the next year The sales target is given to the Marketing Department, where the marketing manager formulates a sales budget by product line in both units and dollars. From this budget, sales quotas by product line in units and dollars are established for each of the corporation's sales districts The marketing manager also estimates the cost of the marketing activities required to support the target sales volume and prepares a tentative marketing expense budget The executive vice president uses the sales and profit targets, the sales budget by product line, and the tentative marketing expense budget to determine the dollar amounts that can be devoted to manufacturing and corporate office expense. The executive vice president prepares the budget for corporate expenses, and then forwards to the Production Department the product-line sales budget in units and the total dollar amount that can be devoted to manufacturing The production manager meets with the factory managers to develop a manufacturing plan that will produce the required units when needed within the cost constraints set by the executive vice president. The budgeting process usually comes to a halt at this point because the Production Department does not consider the financial resources allocated to it to be adequate. When this standstill occurs, the vice president of finance, the executive vice president, the marketing manager, and the production manager meet to determine the final budgets for each of the areas. This normally results in a modest increase in the total amount available for manufacturing costs, while the marketing expense and corporate office expense budgets are cut. The total sales and net operating income figures proposed by the president are seldom changed. Although the participants are seldom pleased with the compromise, these budgets are final. Each executive then develops a new detailed budget for the operations in his or her area None of the areas has achieved its budget in recent years. Sales often run below the target. When budgeted sales are not achieved, each area is expected to cut costs so that the president's profit target can still be met. However, the profit target is seldom met because costs are not cut enough. In fact, costs often run above the original budget in all functional areas. The president is disturbed that Springfield has not been able to meet the sales and profit targets. He hired a consuiltant with considerable relevant industry experience. The consultant reviewed the budgets for the past four years. He concluded that the product-line sales budgets were reasonable and that the cost and expense budgets were adequate for the budgeted sales and production levels Required 1. Discuss how the budgeting process as employed by Springfield Corporation contributes to the failure to achieve the president's sales and profit targets. revised to correct the problem. sales volume falls below budget? Explain your answer 2. Suggest how Springfield Corporation's budgeting process could be 3. Should the functional areas be expected to cut their costs when

Explanation / Answer

Answer:

1. The budget at Springfield is a top-down budget that fails in considering both the requirement for realistic data and interaction important to an effective budgeting process. The President has not given any basis for the goals; therefore one cannot know whether they are realistic for the company. True participation of company in the preparation of budget is minimum and restricted to mechanical gathering and data manipulation. This indicates that there will be little enthusiasm for implementing the budget.

The sales by product line should depend on an accurate sales forecast of the potential market. Hence, the sales by product line should have been developed first to derive the sales target instead of reverse. The initial meeting between the VP of finance, Executive VP, Marketing Manager and Production Manager should be held before. It is held too late in the budget process.

2. Springfield should consider adopting a bottom up budget process. It means that the people responsible for performance under the budget will participate in the decisions by which budget are established. Also, this approach requires initial and continue involvement of sales, financial and production personnel in defining sales and profit goals that are realistic within the constraints under which company operates. Since time consuming, the approach should be more acceptable and workable goal control mechanism.

The sales forecast should develop considering internal sales-forecasts also the external factors. Costs within departments should be divided into fixed and variable, controllable and noncontrollable, discretionary and nondiscretionary. Then flexible techniques can allow departments to identify the costs that can be modified in the planning process.

3. The functional areas should not necessarily be expected to reduce costs when sales volume falls below budget. The time frame of the budget is short enough therefore many costs are relatively fixed. For costs that are fixed, there is little chance for a reduction of short-run changes in volume. The functional areas should be expected to reduce costs should sales volume fall below target when:

i. budgeted costs were more adequate for the original target sales.

ii. Control is exercised over the costs within the function.

iii. Budgeted costs vary to some extent with the change in sales.

iv. they are discretionary costs that can be delayed with no serious effect on the department.

Related Questions

Navigate

• Browse (All)
• Browse P
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.