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 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. Required: 1. Discuss how the budgeting process as employed by Springfield Corporation contributes to thefailure 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.
Master Budget
A master budget can be defined as an estimation of the revenue earned or expenses incurred over a specified period of time in the future and it is generally prepared on a periodic basis which can be either monthly, quarterly, half-yearly, or annually. It helps a business, an organization, or even an individual to manage the money effectively. A budget also helps in monitoring the performance of the people in the organization and helps in better decision-making.
Sales Budget and Selling
A budget is a financial plan designed by an undertaking for a definite period in future which acts as a major contributor towards enhancing the financial success of the business undertaking. The budget generally takes into account both current and future income and expenses.
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
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.
Required:
1. Discuss how the budgeting process as employed by Springfield Corporation
contributes to thefailure 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.
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