Question

In: Accounting

When the company's sales fall below the budget, should the department's expenses be cut?

When the company's sales fall below the budget, should the department's expenses be cut?

Solutions

Expert Solution

Budgets are estimation of revenue and expenses over the budget period. This is a planning tool used by organisation in determining it's future plans.

If the actual sales falls below the budgeted sales, this leads to fall of profit for the budgeted year. Inorder to maintain same level of profit now we need to reduce our expenses (both variable and fixed costs). If we decrease the variable expense this will stabilize the contribution despite of decrease in sales. If we decrease the fixed expenses this will lower the breakeven point thus we can generate same profit with lowered sales value. Departmental costs include mostly fixed costs.

We can reduce the variable expenses by different methods of process re-engineering and also follow Just In Time (JIT) for materials. We can reduce fixed expenses by analysing costs and reducing activity drivers (ABC analysis).

Thus lowering department costs (fixed costs) will lead to lower Breakeven Point in units and thus same profit even with fallen sales.

ekkarill92 answered 1 year ago
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