Accountguru By 20, Palmer Corporation Operates On A Calendar

Accountgurubyp20 1 Palmer Corporation Operates On A Calendar Year Basi

Discuss how the budgeting process employed by Palmer Corporation contributes to the failure to achieve the president’s sales and profit targets. Suggest how Palmer Corporation’s budgeting process could be revised to correct the problems. Should the functional areas be expected to cut their costs when sales volume falls below budget? Explain your answer.

Paper For Above instruction

Palmer Corporation’s annual budgeting process, as described, manifests intrinsic limitations that contribute substantially to its failure to meet the president's sales and profit targets. The process begins with setting targets for sales and net income, and involves multiple departments such as marketing, production, and finance in establishing budgets. However, the process suffers from a lack of dynamic adaptability and an over-reliance on static planning, which often leads to notable discrepancies between budgeted and actual performance.

One significant issue is the disconnect between budgets and actual sales and costs. Although the sales targets are established at the outset, sales frequently fall short, and corresponding budgets for marketing, manufacturing, and other expenses are set based on these initial figures. Because the budgets are essentially fixed, departments are often forced to operate within constraints that do not reflect real-time market conditions. As a consequence, departments tend to overspend or underperform relative to their budgets, but the overarching corporate targets remain unchanged, compounding the problem.

Furthermore, the process emphasizes top-down budgeting where senior management, particularly the president, sets targets without sufficient input from operational levels. This leads to budgets that may be overly optimistic or disconnected from operational realities, fostering a culture of budget padding and protective budgeting, or alternatively, unachievable targets. When actual results fall below targets, managers are compelled to cut costs rather than improve efficiency or market strategies, which exacerbates the risk of falling short.

Another problematic element is the lack of variance analysis and continuous feedback mechanisms. Without ongoing review and adjustment, departments cannot respond swiftly to unforeseen economic shifts or operational inefficiencies. The reliance on initial budgets as benchmarks discourages flexible decision-making and innovation.

To address these issues, Palmer Corporation needs to implement a more flexible and participative budgeting process. Utilizing rolling forecasts or continuous budgeting techniques allows managers to revise targets and actual costs regularly, aligning them more closely with market realities. Incorporating activity-based budgeting can provide more accurate cost estimates, especially in manufacturing, by linking expenses directly to specific activities and outputs.

Improving communication and collaboration among departments is crucial. Engaging operational managers in the budgeting process ensures more realistic targets and fosters a sense of ownership and accountability, motivating managers to work toward attainable goals rather than simply meeting arbitrary budgets.

In terms of cost control when sales decline, it is not sufficient merely to expect departments to cut costs automatically. Cost reductions should be rooted in strategic efficiency improvements rather than across-the-board cuts, which could undermine quality or operational capacity. Managers should be empowered to analyze variances and implement targeted enhancements, focusing on eliminating waste and optimizing processes, instead of indiscriminate expense reductions.

In summary, Palmer’s current budgeting approach fosters rigidity and misaligned incentives, which contribute to the persistent failure to meet sales and profit targets. Transitioning toward a flexible, participative budgeting model that emphasizes continuous review, strategic cost management, and realistic goal-setting would better equip the company to adapt to market fluctuations and improve financial performance.

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