Evaluating a Company’s Budget Procedures Essay

Springfield Corporation operates on a calendar-year basis. It begins the annual budgeting fulfill in late August, when the president establishes targets for the total dollar sales and the net income before taxes for the next year.The sales target is given to the Marketing division, where the marketing handler 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 schematic for each of the corporations sales districts.The marketing manager also estimates the cost of the marketing activities ask to support the target sales volume and prepares a tentative marketing spending budget. The executive vice president uses the sales and profit targets, the sales budget by product line, and the tentative marketing spending budget to determine the dollar amount that derriere be devoted to manufacturing and 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 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 last-place 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 attitude expense budgets are cut. The total sales and net income figures proposed by the president are seldom changed. Although the participants are seldom pleased with the compromise, these budgets are final. Each ex ecutive 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 array below the target. When budgeted sales are not achieved, each area is expected to cut costs so that the presidents 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 pilot program 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 experience with companies in Springfields industry. 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.