Question

Comment on the importance of using flexible budgets in evaluating the performance of the sales manager

Answer 1

Budgeting is a method or technique used for forecasting the production and sales volume. Besides this it estimates the limits of expenses also. The effectiveness of daily operational activities depends on how accurately these forecasts are made.

The original budget in which estimates are made is called static budget. A flexible budget is simply a revised budget based upon actual activity level. It represents what cost should be allocated at the given level of activity. These are also used in preparing future budgets. Due to rapid changes in the business flexible budgets provide flexibility to accommodate these changes and make timely adjustments.

Suppose if sales manager find a change in sales volume, he can reorganize fund allocation as per changes required. It also enables to control cost as it shows where actual performance deviated from the planned performance. Thus evaluation of performance become simpler and on timely basis.

Sales manager can evaluate if there is deviation in the sales volume or selling price or increase in the selling cost of the products. The contribution of every product in sales mix can be evaluated effectively on timely manner. It enables to measure the variances i.e simply comparing planned outcomes with the actual outcomes. These evaluations can be used to determine if the goals are meeting consistently. If not, the manager can modify the procedure or implement the changes. The sales manager can evaluate the variances and can make new sales targets for the department to meet. Sales manager can rely on these figures to know exactly what they are expecting to do in the near future.