By now you know that the sales budget is the first budget prepared. All other budgets are based on the sales projections for the year. For this reason, an accurate sales projection is important. What happens to other budget items when the actual sales are less than what was budgeted? For this question, you are to assume you are the manager of one of the expenses listed below. The sales revenue for the year is coming in at 10% less than budgeted. Because of lower sales, you have to reduce your expense item by 10%. What are the concerns or consequences of reducing one of the following expenses by 10%? I have done an example (direct materials) so that you can see how to respond. You must answer for one of the other expenses.

Example: To reduce direct materials costs, the company may have to buy lower quality raw materials. Lower quality materials may result in more scrap materials. Lower quality materials may also cause bottlenecks in the production line by breaking during manufacturing or not running as efficiently with our machinery. Slower production would decrease efficiency which costs more money. Lesser quality raw materials would also cause lesser quality finished goods which could result in more sales returns and a loss of brand loyalty from customers.

Choose one of these costs to discuss:

Direct labor

Insurance

Depreciation

Machine repairs

Sales salaries

Office salaries

Indirect labor