ACC 561 Week 5

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BYP20-1  

DECISION MAKING ACROSS THE ORGANIZATION

Palmer Corporation operates on a calendar-year basis. It begins the annual budgeting process in late August when the president establishes targets for the total dollar sales and net income before taxes for the next year.

The sales target is given first to the marketing department. The marketing manager formulates a sales budget by product line in both units and dollars. From 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 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. She 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 be adequate.

When this standstill occurs, the vice president of finance, the executive vice president, the marketing manager, and the production manager meet together to determine the final budgets for each of the areas. This normally results in a modest increase in the total amount available for manufacturing costs and cuts in the marketing expense and corporate office expense budgets. The total sales and net 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. When budgeted sales are not achieved, each area is expected to cut costs so that the president’s profit target can be met. However, the profit target is seldom met because costs are not cut enough. In fact, costs often run above the original budget in all functional areas (marketing, production, and corporate office).

The president is disturbed that Palmer has not been able to meet the sales and profit targets. He hired a consultant with considerable experience with companies in Palmer’s industry. The consultant reviewed the budgets for the past 4 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.

Instructions

With the class divided into groups, answer the following.

(a) Discuss how the budgeting process employed by Palmer Corporation contributes to the failure to achieve the president’s sales and profit targets.
(b) Suggest how Palmer Corporation’s budgeting process could be revised to correct the problems.

 

(c) Should the functional areas be expected to cut their costs when sales volume falls below budget? Explain your answer.

 

 

 

 

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ACC 561 Week 5

Budgeting

Kimmel, Weygandt, and Kieso (2011) state, “effective budgeting depends on a sound organizational structure. Structure, authority and responsibility for all phases of operations are clearly defined” (p. 1033). Palmer Corporation as a decentralized organization needs to perform the responsibility accounting to link the manager’s decision-making, and delegate some decisions to those who are lower levels, and with the knowledge of day-to-day operations. The objective is to help in the planning and control of the business.

Under responsibility accounting, manager’s performance is evaluated at every level, and managers can distinguish controllable and non-controllable fixed costs, identify cost, profit, and investment (Kimmel, Weygandt, Kieso, 2011). Based on these principles, the budgeting process employed by Palmer Corporation could be evaluated, revised and corrected, if necessary.

Palmer Corporation – Budgeting Process

Current budget process utilized by Palmer Corporation contributes to the failure in achieving the president’s profit and sales objectives, because the budget goals are established from top to bottom instead of bottom to the top. Palmer Corporations budget is a “top-down” budget which falls short when considering both the realistic data and  human interaction necessary for an useful budgeting and control process The first step of desired target goals established by the president is correct, as the strategic objectives need to be established by the senior staff; however, the process of working out the detailed resource allocation need to stem from below and estimated by departments that actually going to perform the assigned tasks.

Current process creates the environment of conflict and placed various departments into fighting position for resources. If departments were allowed to create their own cost estimates based on desired corporate goals, then cost estimates would have been more accurate. Allowing input from the subordinates into the planning process also creates the environment of collaboration and allows for better motivation for achieving these goals. It also increases the amount of accountability that could be held in regards to performance as detailed goals were created by the individuals in charge of operations.

Palmer Corporation – Revised Budgeting Process

As aforementioned, Palmer Corporation should take in consideration a “bottom to top” or participative budget process. Employees responsible for performance related to the budget would participate in decisions of the established budget. The current budget process

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