Schaffer Company is a large multidivisional firm with several plants in each division. The company uses a comprehensive budgeting system for planning operations and measuring performance. The annual budgeting process begins in August, five months before the beginning of the fiscal year. At this time, the division managers submit proposed budgets for sales, production and inventory levels, and expenses. Capital expenditure requests also are formalized at this time. Expense budgets include direct labor and all factory overhead items, separated into fixed and variable components. Direct materials are budgeted separately when production and inventory schedules are developed.
Expense budgets for each division are developed from each plant's results, as measured by the percent variation from an adjusted budget in the first 6 months of the current year, and a target expense reduction percentage established by the corporation.
To determine plant percentages, the plant budget for the half-year period just completed is revised to recognize changes in operating procedures and costs outside the control of plant management, such as wage changes and product style changes. The difference between this revised budget and actual expenses is the controllable variance, expressed as a percentage of actual expenses. If unfavorable, this percentage is added to the corporate target expense reduction percentage. A favorable plant variance percentage is subtracted from the corporate target. If a plant had a 2% unfavorable controllable variance and the corporate target reduction was 4%, the plant's budget for next year should reflect costs approximately 6% below this year's actual costs.
Next year's final budgets for the corporation, its divisions, and plants are adopted after corporate analysis of the proposed budgets and a careful review, with each division manager, of the changes made by corporate management.
Division profit budgets include allocated corporate costs, and plant profit budgets include allocated division and corporate costs.
Required:
Evaluate the budget procedures of Schaffer Company with respect to its effectiveness for planning and controlling operations.