WHY SALES BUDGET???
Sales budget is the most important budget while making the overall budget for the organization for a particular fiscal year.
It is important in the sense that how would anybody make fiscal budget for organization if he don't know about how much to sale or what are the organization's sale would be???
If you knew the sales volume or units of product you want to sale in a particular fiscal year then you will make production budget accordingly & similarly you will purchase raw material & hire labor to meet requirements.
So if you don't know how much you want to sale then how would you budget other things and how would you compare your performance at the end of fiscal year???
Whiz Calculator Company is currently considering the new method of planning and controlling selling cost. The old method was unsatisfactory according to Mr. Reisman.
According to old method, selling expenses were budgeted on a fixed or appropriation basis. Each October, the accounting department sent records of actual expenses for the preceding year and for the current year - to - date, to the branch managers and to other managers who in charge of selling departments.
Looking into the preceding year’s report & by their judgment, these department heads drew up and submit estimates of the expenses for their departments for the succeeding year.
Then the estimates made by the branch managers were sent to the sales manager, who was in charge of all branch sales. He determined whether or not they were reasonable and cleared up any questionable items by correspondence.
Upon the approval by the sales manager, the estimates of branch expenses were submitted to the manager of marketing (Paula Melmad), who was in charge of all selling, promotional, and warehousing activities.
Then the manager of marketing discussed these numbers with the managers concerned, and after differences were reconciled, the estimates of all selling departments were combined into selling expense budget.
Lastly budget was submitted to the budget committee for final approval.
These budgeted figures were divided into 12 equal amounts and compared to each month actual results. (Pg No. 171)
In the new president’s point of view there were two limitations of the old method. Firstly, there was no 100% confidence in reasonableness of the estimates made by department heads. Secondly, selling conditions changed substantially after the budget was adopted, however under the old method it was impossible to modify the budgeted expenses for these changes. Therefore, the new president introduced a proposal of measuring selling cost on a fixed and variable portion basis.
Bernard Riesman, the president of Whiz Calculator Company, was very concerned about the method of measuring and appraisal of selling expenses. He was very sure that the method used was the thing to be changed in the company. Therefore, he introduced a proposal of new method of measurement.
Under his proposal all selling expense items would be divided into two portions. One portion is variable to the sales and another is fixed. He thinks that this method would be better in making budgeted selling expense report & it would be further possible to adjust the budgeted report to the increased sales volume.
In order to accomplish this goal the management of the company decided to find the fixed portion of selling expenses, by determining the amount of expenses that had to be incurred at the minimum sales volume the company can operate. It was ascertained that the minimum sales volume required to operate the company was 65 percent of total capacity of the company. (Pg No. 173)
The controller believed that budget which varies with the sales would certainly be better than a budget that did not vary at all.
So prior planning was done to derive accurate measures for variation in selling expenses...