PROBLEM 9-20 Evaluating a Company\'s Budget Procedures LH Springfield Corporatio

Question

PROBLEM 9-20 Evaluating a Company's Budget Procedures LH 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 dolars. 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 normaly 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 consultant 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. 1. Discuss how the budgeting process as employed by Springfield Corporation contributes to the failure to achieve the president's sales and profit targets. 2. Suggest how Springfield Corporation's budgeting process could be revised to correct the problem 3. Should the functional areas be expected to cut their costs when sales volume falls below budget? Explain your answer

Explanation / Answer

Answer:-

One of the first practices that I would think would need to be overhauled would be to apply the practice of responsibility accounting. What I noticed was that there were departments and managers responsible for budgeting for other departments, when really each department manager should be responsible for budgeting the items that they can control to some extent. For example, the marketing department correctly budgets for marketing activities expenses, but why would the marketing manager be responsible for formulating sales targets

Answer:-

After the president communicates his total dollar sales and pretax income goals, those goals should go to the manager of the sales teams who should then formulate a sales budget by product line and sales dollars. From there, the production manager should evaluate the sales budget and prepare the production budget, direct materials budget, direct labor budget, and manufacturing overhead budget as well as an ending finished goods inventory budget. At that point the marketing manager and EVP can formulate budgets for selling and administrative expenses. This approach would allow each department manager to accurately forecast costs and set reasonable goals, goals for revenue and cost control that they would then be responsible for.

Answer:-

After reading the case there are several things we can point out regarding the budgeting process they are using. First of all, there is a lot of silos in this process. Departments are working on their own needs regarding the budget, cost, and goals for the year without considering how can this have an effect in other departments and in the overall budgeting and yearly goals of the company. I think there should be a committee with all Department's Managers in order to have a clear definition on companies target budget and have a clear road map of what is to achieve in terms of goals, sales, and profitability for next year.  Second, but also very important is that there should be an exercise to evaluate if the goals proposed by Management are realistic and if there is a good plan in order to achieve the numbers.   As it is mention also in the case, Springfield have not being able to achieve budget numbers in several years. This is a real red flag and Management need to understand the reasons of why this had happened and change their strategy in order to achieve realistic goals for next and coming years.

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