Should the functional areas be expected to cut their costswhen sales volume falls below budget? Explain your answer. ( 200 words max-)
use this scenario
Palmer Corporation operates on a calendar-year basis. Itbegins the annual budgeting process in late August when the presidentestablishes targets for the total dollar sales and net income before taxes forthe next year.
The sales target is given first to the marketing department.The marketing manager formulates a sales budget by product line in both unitsand dollars. From this budget, sales quotas by product line in units anddollars are established for each of the corporation’s sales districts. Themarketing manager also estimates the cost of the marketing activities requiredto support the target sales volume and prepares a tentative marketing expensebudget.
The executive vice president uses the sales and profittargets, the sales budget by product line, and the tentative marketing expensebudget to determine the dollar amounts that can be devoted to manufacturing andcorporate office expense. The executive vice president prepares the budget forcorporate expenses. She then forwards to the production department theproduct-line sales budget in units and the total dollar amount that can bedevoted to manufacturing.
The production manager meets with the factory managers todevelop a manufacturing plan that will produce the required units when neededwithin the cost constraints set by the executive vice president. The budgetingprocess usually comes to a halt at this point because the production departmentdoes 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 managermeet together to determine the final budgets for each of the areas. Thisnormally results in a modest increase in the total amount available formanufacturing costs and cuts in the marketing expense and corporate officeexpense budgets. The total sales and net income figures proposed by thepresident are seldom changed. Although the participants are seldom pleased withthe compromise, these budgets are final. Each executive then develops a newdetailed budget for the operations in his or her area.
None of the areas has achieved its budget in recent years.Sales often run below the target. When budgeted sales are not achieved, eacharea is expected to cut costs so that the president’s profit target can be met.However, the profit target is seldom met because costs are not cut enough. Infact, costs often run above the original budget in all functional areas(marketing, production, and corporate office).
The president is disturbed that Palmer has not been able tomeet the sales and profit targets. He hired a consultant with considerableexperience with companies in Palmer’s industry. The consultant reviewed thebudgets for the past 4 years. He concluded that the product line sales budgetswere reasonable and that the cost and expense budgets were adequate for thebudgeted sales and production levels.
Should the functional areas be expected to cut their costswhen sales volume falls below budget? Explain your answer. ( 200 words max-)
