identify one aspect of the budgeting process that you think is contributing to the failure to meet the president's sales and profit targets and suggest how it could be revised to correct the problem?
PROBLEM 9-20 Evaluati Springfield Corpo cess in late Augus 19-20 Evaluating a Company's Budget Procedures (L09-1] cald Corporation operates on a calendar-year basis. It begins the annual budgeting pro- 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 formu- des a sales budget by product line in both units and dollars. From this budget, sales quotas by moduct 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, 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 it 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 manufactur- ing costs, while the marketing expense and corporate office expense budgets are cut. The total sales and net operating 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. nen budgeted sales are not achieved, each area is expected to cut costs so that the president's " target can still be met. However, the profit target is seldom met because costs are not cut hough. In fact, costs often run above the original budget in all functional areas. The president is bed that Springfield has not been able to meet the sales and profit targets. He hired a consul- considerable relevant industry experience. The consultant reviewed the budgets for the ur years. He concluded that the product-line sales budgets were reasonable and that the cost se budgets were adequate for the budgeted sales and production levels. disturbed that Sprin tant with considerable rele past four years. He con and expense budgets Wer
