Eases tor Chapter 10: Strategy and Master Budgeting Case 1: Evaluating a Company's Budget Procedure: Springeld Corporation operates on a calendaryear basic. It begins the annual budgeting process in late August, when the president establishes targets for total sales dollars and net operating income before taxes for the next year. The sales target is given to the Marketing Department, where the marketing manager formulates a sales budget byproduct line in both units and dollars. For 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 prot 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 ofce expense. The executive vice president prepares the budget for 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 nancial resources allocated to it to be adequate. When this standstill occurs, the vice president of nance, the executive vice president, the marketing manager, and the production manager meet to determine the nal 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 o'lfice expense budgets are cut. The total sales and net operating income gures proposed bythe president are seldom changed. Although the participants are seldom pleased with the compromise, these budgets are nal. Each executive then develops a new detailed budget for 1e operations in his or her area. None of the areas has achieved its budget in recent years. Sales often run below the target. 1When budgeted sales are not achieved, each area is expected to cut costs so that the president's prot target can still be met. However, the prot 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 Springeld has not been able to meet the sales and prot targets. He hired a consultant with considerable relevant industry experience. 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. Required 1. Discuss how the budgeting process as employed by Springeld Corporation contributes to the failure to achieve the president's sales and prot targets. 2. Suggest how Springeld Corporation's budgeting process could be revised to correct the problem 3. Should the functional areas he expected to cut their costs when sales volume falls below budget? Explain your answer (This case is ohtoincti'om MmmgerioiAmtotng :2\"Ii edition, Garrison et, of.)