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devry fin 505 week 3 case study 1




Question;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;with the compromise, these budgets are final.;Each executive then develops a new detailed 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, each;area is expected to cut costs so that the president?s profit target can still;be met. However, the profit target is;seldom met because costs are not cut enough.;In fact, costs often run above the original budget in all functional;areas. The president is disturbed that Springfield has not been;able to meet the sales and profit targets.;He hired a consultant with considerable experience with companies in Springfield?s;industry. The consultant reviewed the;budgets for the past four years. He;concluded that the product-line sales budgets were reasonable and that the cost;and expense budgets were adequate for the budgeted sales and production levels.


Paper#50446 | Written in 18-Jul-2015

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