Whiz Calculator Company Sales Budget

Whiz Calculator Company Sales Budget

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Whiz Calculator Company

WHY SALES BUDGET???
Sales budget is the most important budget while making the overall budget for the organization for a particular fiscal year.

It is important in the sense that how would anybody make fiscal budget for organization if he don't know about how much to sale or what are the organization's sale would be???

If you knew the sales volume or units of product you want to sale in a particular fiscal year then you will make production budget accordingly & similarly you will purchase raw material & hire labor to meet requirements.

So if you don't know how much you want to sale then how would you budget other things and how would you compare your performance at the end of fiscal year???

Introduction:-

Whiz Calculator Company is currently considering the new method of planning and controlling selling cost. The old method was unsatisfactory according to Mr. Reisman.

According to old method, selling expenses were budgeted on a fixed or appropriation basis. Each October, the accounting department sent records of actual expenses for the preceding year and for the current year - to - date, to the branch managers and to other managers who in charge of selling departments.

Looking into the preceding year’s report & by their judgment, these department heads drew up and submit estimates of the expenses for their departments for the succeeding year.

Then the estimates made by the branch managers were sent to the sales manager, who was in charge of all branch sales. He determined whether or not they were reasonable and cleared up any questionable items by correspondence.

Upon the approval by the sales manager, the estimates of branch expenses were submitted to the manager of marketing (Paula Melmad), who was in charge of all selling, promotional, and warehousing activities.

 Then the manager of marketing discussed these numbers with the managers concerned, and after differences were reconciled, the estimates of all selling departments were combined into selling expense budget.

 Lastly budget was submitted to the budget committee for final approval.

 These budgeted figures were divided into 12 equal amounts and compared to each month actual results. (Pg No. 171)

 In the new president’s point of view there were two limitations of the old method. Firstly, there was no 100% confidence in reasonableness of the estimates made by department heads. Secondly, selling conditions changed substantially after the budget was adopted, however under the old method it was impossible to modify the budgeted expenses for these changes.

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Therefore, the new president introduced a proposal of measuring selling cost on a fixed and variable portion basis.

 Bernard Riesman, the president of Whiz Calculator Company, was very concerned about the method of measuring and appraisal of selling expenses. He was very sure that the method used was the thing to be changed in the company. Therefore, he introduced a proposal of new method of measurement.

 Under his proposal all selling expense items would be divided into two portions. One portion is variable to the sales and another is fixed. He thinks that this method would be better in making budgeted selling expense report & it would be further possible to adjust the budgeted report to the increased sales volume.

 In order to accomplish this goal the management of the company decided to find the fixed portion of selling expenses, by determining the amount of expenses that had to be incurred at the minimum sales volume the company can operate. It was ascertained that the minimum sales volume required to operate the company was 65 percent of total capacity of the company. (Pg No. 173)

 The controller believed that budget which varies with the sales would certainly be better than a budget that did not vary at all.

 So prior planning was done to derive accurate measures for variation in selling expenses over a longer period of time.

 Linear equation where used in order to know fluctuation of sales item with the sales volume and from them future predictions where obtained accordingly.

 As a result of which controller had both a rate of variation at a particular point on selling expense graph for each expense item?




 We will go by the proposed budgeting system mention in the case.
Justification for the same is mentioned below :-

 In earlier sales budget system it was impossible for any one to ascertain with any feeling of certainty the reasonableness of the estimates made by the various departments head .

 One obvious cause of variation in selling expenses was the variation in the “job to be done”

 Selling conditions often changed substantially after the budget was adopted, but in old system there was no provision for making the proper corresponding changes in the selling expenses budget.

 Neither was there a logical basis for relating selling expenses to actual sales volume obtained.

 So it was impossible to determine how large the increase in expenses should be.

 As a means of overcoming this weaknesses, possibility of setting selling cost budget standards on fixed and variable basis would be appropriate and reasonable one .

 In % to sales method there is no clarity on % to be taken in calculating each selling expenses.

 The expense estimates made by the department heads cannot be traced and checked if there were right or wrong in case of the present budgeting system.

 Every expense does not have any particle connection with the sales.

 It was not possible to adjust the expenses adequately in case of increase in sales volume.{For example:- Rent, Depreciation, Etc}

Suggestion For Sales Expense Reporting System @ Whiz Calculator

 Management should give some buffer budget to Paula Melmed, which would not be known to other managers of different department.

 Now if the sales volume crosses the budgeted figure, Paula Melmed can route this extra expense (which is usually variable in nature) through this additional budget provided to her.

 But this additional budget should only be used after the due permission in writing from the top management.

Hard to digest but a true fact:-
“Any one in the selling game knows that some times customers fall over each other in their hurry to buy, and other times, no matter what we do, they want even nibble. It’s a waste of time to make fancy formulate for selling cost budget under condition like that.”
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