Based on the situation below:

1. What type of budget is Cotton Candy using?
2. Specifically in details explain how does the budget planning contribute to Cotton Candy's failure in reaching goals?
3. What changes in the budget process need to be revised to fix the current problem?
4. Should the functional areas be expected to cut their costs when sales volume falls below budget? Why?

SITUATION: Cotton Candy Corporation operates on a calendar-year basis.

The sales target is given first to the marketing department. 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 amounts that can be devoted to manufacturing and corporate

office expense. The executive vice president prepares the budget for corporate

expenses. She 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 together 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 and cuts in the marketing expense and corporate office

expense budgets. 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 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 (marketing,

production, and corporate office).

The president is disturbed that Cotton Candy has not been able

to meet the sales and profit targets. He hired a consultant with considerable

experience with companies in Cotton Candy's industry. The consultant reviewed

the budgets for the past 4 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.