Accounting Case Study
a) Discuss how the budgeting process employed by Peters Corporation contributes to the failure to achieve the president’s sales and profit targets.
The first problem would be that the president established targets for the total dollar sales and net income before taxes for the next year. Then the president gave the sales target to the marketing department.
By starting at the top and working its way down the chain of command causes problems because not all of the departments are involves in the decision making process. This method does not work or otherwise there would not be problems in achieving the budget, sales below target, or having departments fight over the budget being wrong and how much more money that they can get.
This is establishing goals that are not obtainable and the entire department should be able to give their input. BY giving their input it will allow for a better created budget.
(b) Suggest how Peters Corporation’s budgeting process could be revised to correct the problems.
In developing the budget, each level of management should be invited to participate. This "bottom-to-top" approach is referred to as participative budgeting. The advantages of this type of budget are that lower-level managers have more detailed knowledge of their specific area and would be able to provide more accurate budget estimates. The second advantage is that the lower lever mangers will like the budget better if they help in the process. The risk of having unrealistic budgets is greater when the budget is developed from top management down.
(c) Should the functional areas be expected to cut their costs when sales volume falls below budget? Explain your answer.
The budget should focus on specific goals. If some departments are over budget and the sales volume is low then they will need to cut their budget. In the budget process communication between the departments is necessary for effective budget planning.
Reference:
Kimmel, P.D. PhD,
The first problem would be that the president established targets for the total dollar sales and net income before taxes for the next year. Then the president gave the sales target to the marketing department.
By starting at the top and working its way down the chain of command causes problems because not all of the departments are involves in the decision making process. This method does not work or otherwise there would not be problems in achieving the budget, sales below target, or having departments fight over the budget being wrong and how much more money that they can get.
This is establishing goals that are not obtainable and the entire department should be able to give their input. BY giving their input it will allow for a better created budget.
(b) Suggest how Peters Corporation’s budgeting process could be revised to correct the problems.
In developing the budget, each level of management should be invited to participate. This "bottom-to-top" approach is referred to as participative budgeting. The advantages of this type of budget are that lower-level managers have more detailed knowledge of their specific area and would be able to provide more accurate budget estimates. The second advantage is that the lower lever mangers will like the budget better if they help in the process. The risk of having unrealistic budgets is greater when the budget is developed from top management down.
(c) Should the functional areas be expected to cut their costs when sales volume falls below budget? Explain your answer.
The budget should focus on specific goals. If some departments are over budget and the sales volume is low then they will need to cut their budget. In the budget process communication between the departments is necessary for effective budget planning.
Reference:
Kimmel, P.D. PhD,