Question

Part A: Evaluating a Company’s Budget Procedures and Behavioural Aspects of Budgeting Allenby Ltd is a distributor of earrings to various retail outlets located in shopping malls across the country. The company operates on a financial year basis and begins its annual budgeting process in late March when the Chief Executive Officer (CEO) establishes targets for total sales dollars and net operating income before taxes for the next financial year. The sales target is given to Marketing Department, where the Marketing manager, Ms Dory Thompson formulates a sales budget in both units and dollars. Ms Thompson also estimates the cost of the marketing activities required to support target sales volume and prepares a tentative marketing expense budget. The Deputy CEO uses the sales and profit targets, and the tentative marketing expense budget to determine the dollar amounts that can be devoted to purchases and office expense. The Deputy CEO prepares the budget for office expenses, and then forward to the Purchases Department, the sales budget in units and total dollar amount that can be devoted to purchases. The purchases manager is Mr Mark Treble. The purchases manager develops a purchases plan that will acquire the required inventory units when needed within the cost constraints set by the Deputy CEO. The budgeting process usually comes to a halt at this point because the purchases manager does not consider the financial resources allocated to his department to be adequate. When this standstill occurs, the Chief Finance Officer (CFO), the Deputy CEO, the marketing manager, and the purchases manager meet to determine the final budgets for each of the areas. This normally results in a modest increase in the total amount available for inventory costs, while the marketing expense and office expense budgets are cut. The total sales and net operating income targets proposed by the CEO are seldom changed. Although the managers are hardly pleased with the compromise, these budgets are final. The marketing and purchases managers then develop a new detail budget for their own departments. However, none of these departments has achieved their budgets in recent years. Sales often run below the target. When budgeted sales are not achieved, each department is expected to cut costs so that the CEO’s profit 3 target can still be met. Nonetheless, the profit target is hardly met since costs are not cut enough. In fact, costs often run above the original budget in all departments. The CEO is concerned that the company had not been able to meet its sales and profit targets. He employed a consultant with considerable relevant industry experience. The consultant suggested a participatory budgeting approach where the marketing and production managers would be requested by the CEO to coordinate in order to estimates sales and purchases quantities. Ms Thompson decided that she would start out by looking at recent sales history, potential customers, and customers’ spending patterns. Subsequently, she would intuitively forecast the best sales quantity and pass it to Mr Treble so he can estimate a purchases quantity. Since Ms Thompson and Mr Treble did not want to fall short of the sales estimates, they gave themselves ‘a little breathing room’ by lowering the initial sales estimates by between 5% and 10%. As a result, they had to adjust the projected purchases as the year progressed, which changes the estimated ending inventory. They also made similar adjustments to expenses by adding at least 10% to the initial estimates. Required:

You are required to prepare a to the CEO discussing the follow aspects.

Please discuss in details the questions

3. The new budget approach recommended by the consultant.

4. Ms Thompson and Mr Treble behaviour under the new budget approach, and the potential impact of their behaviour.

Answer 1

A predicted or an anticipatory target is achevied by a business , if a detailed evaluation of comnercial scenario or the market at which the product is floated , is not made well. Given at the details is that the projected profit could not be obtained. Due this, the C.E.O of the firm had to out source an experienced consultant to bring out a resolution to this issue. This generally indicates that there had to be an issue related with operation planning that budget projection did not went as planned. In other words the planning seems insufficient that projections had fell short beyond a normal level that it became a remarkable issue for the business to be resolved. The planning might have turned insufficient for the reason that the planner had his vision limited pertaining marketing issues. Here the planner is C.E.O. .The reason for budget projection failure may be because of the reason that the budget plans were made with out deeply considering the issues prevailing at the market. The issues that generally exists against a product at market are lack the demand of products , competetiors strategy etc.

3)The point of issue where a resplution is needed, is were the fruitfulness of suggestion made by the consultant , assigned by C.E.O comes to play. Its because the failure for planning was concluded to be lack of depth in marketing analysis . So, as suggested by the consultant, if the Production and Marketing Manager is joined with C.E.O, is the most pragmatic solution for the issue stated above. Its because , the marketing manager , due to high exposure at market , will be very well able to predict the variations in market due to any adverseries such as a competitor strategy or lack of demand. Since the marketing manager would have a deep understanding of market where the product is floated , she could very well figure out resolutions in form of plans or strategies relating to marketing. This will make the budgeting process more practical and it projections more realistic. This is because such budgets prepared as a result of proper market analysis would be appreciably close to projections made in terms of quantity. Also, the production department would turn out to be remarkably cost effective, as the production schedule is based on relevant qualitative analysis. These are the most important benefits of the suggestions made by the consultant. It is concluded to be a practical resolution for the issue

4) The behavior regarding any act in life is very important . Its because a proper behavior that optimizes the fruitfulness of any act. Therefore both managers under new budget should maintain a very positive and commited approach towards their respective tasks. This is specified here because marketing planning and execution are such a complex and sensitive issue that a minor error can considerably direct the results to negative end. Hence this was specified to give an emphasis on the importance of the issue and to detail its impact. Now let's look into professional behaviors , that should be adopted by both.

A) Marketing Manager- The tasks of marketing manager under new budget should include constant analysis for consumer demand by monitoring consumer flow, accurate analysis of product unit required, always maintain minimum supply requirements . The analysis made should be very accurate and sales forcast based on history has to be made with a very practical view point as accuracy in all elements specified here cannot be compromised. In the end the required data has to be duly conveyed to the production manager. The data should include the quantity requirement, quality requirements if any and the time limit with in which the products are to be delivered.

2) The duties of production manager under new budget should include exevution of general production plan stricktly as per the budget and further production activities as per the data received from the marketing manager.

Considering the above facts it is very certain that both the managers should at once stop taking any initiatives of their own for any personal biases as they did by providing breathing room for themselves by lowering sales target.