Evaluating a Company’s Budget Procedures
Springfield Corporation operates on a calendar-year basis. It begins the annual budgeting process 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 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 amount that can 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 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 income figures proposed by the president are seldom changed. Although the participants are seldom pleased...
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