Reference no: EM132801034

Question 1: Top-down versus bottom-up budgeting (LO4)."Nobody in my firm is held to targets they don't accept. But, once they sign off, I expect them to deliver." These statements summarize Walter George's budgeting philosophy. Walter, who owns and operates a medium-sized firm that makes road sealant, is a no-nonsense person who attributes his financial success to hard work, risk-taking, and his ability to get the best from his employees.

"Sure, we have a participative budget!" says Melanie Mason, Walter's plant manager. In a wry tone, she adds, "Including Walter, we have 10 in our management team. In this team, we all get one vote. However, as owner, Walter gets 10 votes! And, of course, we rely on a majority vote when making decisions!" Digging deeper into the budgeting process for sales, you discover the following steps:
• Each of the five salespersons prepares a customer-by-customer listing of sales for the past three years. Based on this information and their knowledge about customer needs, they project an overall sales goal for each customer, by month.
• The sales manager aggregates all of this information and modifies it a bit. In particular, the sales manager looks at differences in sales growth and corrects low projections to be in line with the average. He, of course, discusses this correction with the concerned salesperson. The usual tactic is to hold up the other forecasts and attribute lack of sales growth to lower talent.
• The sales manager then meets with Walter. By this time, Walter has backed out of his sales expectations for next year based on his desired profit. He discusses the overall target with the sales manager. The usual result is a 3 to 7% increase in projected sales, which the sales manager evenly allocates among the five salespersons.
•Of course, Walter insists that the sales manager discuss and negotiate any change with the sales force. Drawing on his experience as a successful salesperson who has never missed a target, Walter believes that the adjustment is to correct for padding by the sales manager. He just believes that with suitable logic and persuasion, he could set high but achievable targets for his sales team.

Required:
Comment on the participative nature of the sales budgeting process at Walter's firm. What kinds of positive and negative behaviors do such processes encourage?

Question 2: Budgeting and performance evaluation (LO4). Florida Cruises operates a fleet of glass bottom boats that give tours of the coral reefs off Key West, Florida. Since its inception, the firm has fetched its owner a healthy return on investment. One reason the company does so well is that the owner believes in keeping tight control over operations. Every December, the owner and the manager evaluate the prior year's operations and care- fully plan next year's operations. At the end of these discussions, they project income for the coming year. The manager and other operating staff receive a bonus if actual income exceeds budgeted income. This incentive scheme appeared to work well in the past. The manager and the staff worked hard to reap bonuses at the end of each year. However, the performance for the most recent year did not quite measure up to expectations, as the following data indicate:

Florida Cruises
Income Statement for Year Ending December 31
	Budgeted	Actual
Revenues	$ 2,800,000	$ 2,050,000
Less Variable Costs
Direct materials (fuel supplies)	480,000	520,000
Direct labor	1,100,000	959,000
Variable overhead	175,000	148,000
Less Fixed Costs
Operating overhead (boats, pier, salaries)	320,000	420,000
Marketing and administrative	380,000	325,000
Profit before taxes	$    345,000	$  (313,000)

Naturally, the manager and staff did not receive a bonus. However, the manager was upset with this turn of events. "We all worked extra hard this year. It was a tough year. The fuel prices more than doubled. We lost three months' worth of revenues because of hurricanes-people were fleeing the Florida Keys. How can we expect tourists to come in and see coral reefs at a time like that? We should not be punished for what is not under our control," he complained. To make his point, the manager provided the following additional information to the owner:
• The loss in revenues is mostly attributable to two devastating hurricanes. While hur- ricanes are common in Key West, the past year set a record in terms of the number and severity of hurricanes that passed over the Keys.
• The increase in direct material costs is attributable to a sharp increase in fuel prices (the price run-up was not anticipated at the time of budgeting).
• About $140,000 of fixed operations overhead was attributable to the expenses that were incurred to protect the boats from the hurricanes and to fix some unavoidable damage to the pier and sheds.
The manager claimed that if the budget were revised to account for these factors, the actual performance would appear much more reasonable given the circumstances.

Required:
Should a bonus be awarded to the manager and operating staff?

Attachment:- Assignment for review.rar