The executives at Stark Inc., a plumbing supply manufacturer, recently reviewed production capacity for the upcoming year and set production budgets. Based on the number of units that they expected to produce, they budgeted sales and set sales targets for each of their retail locations. They did not ask for the input of the individual store managers as they believed that they had sufficient information and they wanted to ensure that the store targets were not easily attainable. When the actual sales numbers started to come in, they were much lower than the budget. In investigating the variance, the company found that one location had a new competitor that had just opened down the street, and another had significant road construction that impeded the traffic flow and cut down on customers. There were also some new products on the market that were cutting into the companys market share. Because of the missed sales budget, the company had overproduced, resulting in excess inventory.

Required:

1. Explain the role of a sales budget in the development of the annual profit plan.
2. Identify four factors that should be considered when preparing a sales forecast.
3. Which two factors did management fail to consider in this scenario and what was the impact?
4. Discuss authoritative and participative budgets and identify which type is described in the scenario.
5. Identify and describe two best practice guidelines for the budget process.
6. Identify and describe four characteristics that define a successful budgeting process.
7. Discuss the financial impact of excess inventory.