1. The budget at Springfield is an imposed “top-down” budget that fails to consider both the need for realistic data and the human interaction essential to an effective budgeting/control process. The President has not given any basis for his goals, so one cannot know whether they are realistic for the company. True participation of company employees in preparation of the budget is minimal and limited to mechanical gathering and manipulation of data. This suggests there will be little enthusiasm for implementing the budget.
The sales by product line should be based on an accurate sales forecast of the potential market. Therefore, the sales by product line should have been developed first to derive the sales target rather than the reverse. The initial meeting between the Vice President of Finance, Executive Vice President, Marketing Manager, and Production Manager should be held earlier. This meeting is held too late in the budget process.
2. Springfield should consider adopting a “bottom-up” budget process. This means that the people responsible for performance under the budget would participate in the decisions by which the budget is established. In addition, this approach requires initial and continuing involvement of sales, financial, and production personnel to define sales and profit goals that are realistic within the constraints under which the company operates. Although time consuming, the approach should produce a more acceptable, honest, and workable goal-control mechanism.
The sales forecast should be developed considering internal salesforecasts as well as external factors. Costs within departments should be divided into fixed and variable, controllable and noncontrollable, discretionary and nondiscretionary. Flexible budgeting techniques could then allow departments to identify costs that can be modified in the planning process.
3. The functional areas should not necessarily be expected to cut costs when sales volume falls...