The difference between actual and budgeted numbers is lower under the new system than that under the old system.
The existing sales expense budgeting system has some weaknesses that make budgeted numbers unreliable and misleading.
We recommend that the company should abandon the existing system and replace it with the new one as it will provide more reliable and accurate budgeting information for decision making.
Sales Expense Budget Analysis
Our analysis begins with a budget report currently used under the existing system. It shows a difference between actual and budgeted numbers that is equal to +4512 USD, however, under the new system, the difference is reduced to +524 USD. It means that the sales expense measured on more accurate basis. Under the new system, expenses are separated as variable with sales volume (e.g., sales force compensation), partly variable with sales volume (e.g., travel expense), and not related to sales volume at all (e.g., rental and depreciation). The fixed portion is set on the minimum amount to be sold at 65% of overall factory capacity and is the amount of money our company should appropriate for the sales budget no matter how sales will fluctuate as long as it is above the 65% capacity. As a result, the new system results in a much smaller difference because some fixed portion of the expenses do not depend on the sales volume.
Weaknesses of Old System vs. Improvement of New System
Under the existing system, the expense estimates made...