Should the functional areas be expected to cut their costs
when sales volume falls below budget? Explain your answer. ( 200 words max-)       use this scenario
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
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.
Should the functional areas be expected to cut their costs
when sales volume falls below budget? Explain your answer. ( 200 words max-)

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