Springfield Corporation operates on a calendar-year basis

Problem 9-8 (Evaluating a Company's Budget Procedures) Springfield Corporation operates on a calendar-year basis. It begins the annual budgeting process in late August, when the president establishes targets for total sales dollars and net operating income before taxes for the next year. The sales target is given to the marketing Department, where 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 expenses budget. The executive vice president uses the sales and profits 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, and then forwards 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 it to be adequate. When this standstill occurs, the vice president of finance, the executive vice president, the marketing manager, and the production manager meet to determine ht final budgets for each of the areas. This normally results in a modest increase in the total amount available for manufacturing costs, while the marketing expense and corporate office expense budget are cut. The total sales and net operating 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 profits target can still be met. However, the profits target is seldom met because cost are not cut enough. In fact, costs often run above the original budget in all functional areas. The president is disturbed that Springfield has not been able to meet the sales and profit targets. He hired a consultant with considerable relevant industry experience. The consultant reviewed the budgets for the past four years. He concluded that the product-line sales budgets were reasonable and that the cost and expenses budgets were adequate for the budgeted sales and production levels.

Required:
1. Discuss how the budgeting process as employed by Springfield Corporation contributes to the failure to achieve the president’s sales and profits targets.
2. Suggest how Springfield Corporation’s budgeting process could be revised to correct problem.
3. Should the functional areas be expected to cut their costs when sales volume falls below budget? Explain your answer.

Click here for the solution: Springfield Corporation operates on a calendar-year basis

Swift Corp., a capital goods manufacturing business that started on January 4, 2010, and operates on a calendar-year basis

E18-15 (Installment-Sales Method and Cost-Recovery Method) Swift Corp., a capital goods manufacturing business that started on January 4, 2010, and operates on a calendar-year basis, uses the installment sales method of profit recognition in accounting for all its sales. The following data were taken from the 2010 and 2011 records.

2010 2011
Installment sales $480,000 $620,000
Gross profit as a percent of costs 25% 28%
Cash collections on sales of 2010 $130,000 $240,000
Cash collections on sales of 2011 –0– $160,000

The amounts given for cash collections exclude amounts collected for interest charges.

Instructions
(a) Compute the amount of realized gross profit to be recognized on the 2011 income statement, prepared using the installment-sales method.
(b) State where the balance of Deferred Gross Profit would be reported on the financial statements for 2011.
(c) Compute the amount of realized gross profit to be recognized on the income statement, prepared using the cost-recovery method.

Click here for the solution: Swift Corp., a capital goods manufacturing business that started on January 4, 2010, and operates on a calendar-year basis

Kenny Corp., a capital goods manufacturing business that started on January 4, 2007, and operates on a calendar-year basis, uses the installment-sales method of profit recognition in accounting for all its sales

Exercise 18-15 (E18-15) (Installment-Sales Method and Cost Recovery) Kenny Corp., a capital goods manufacturing business that started on January 4, 2007, and operates on a calendar-year basis, uses the installment-sales method of profit recognition in accounting for all its sales. The following data were taken from the 2007 and 2008 records.

2007 2008
Installment sales $480,000 $620,000
Gross profit as a percent of costs 25% 28%
Cash collections on sales of 2007 $140,000 $240,000
Cash collections on sales of 2008 –0– $180,000
The amounts given for cash collections exclude amounts collected for interest charges.
Instructions
(a) Compute the amount of realized gross profit to be recognized on the 2008 income statement, prepared using the installment-sales method.
(b) State where the balance of Deferred Gross Profit would be reported on the financial statements for 2008.
(c) Compute the amount of realized gross profit to be recognized on the income statement, prepared using the cost-recovery method.

Click here for the solution: Kenny Corp., a capital goods manufacturing business that started on January 4, 2007, and operates on a calendar-year basis, uses the installment-sales method of profit recognition in accounting for all its sales