RDBS Corporation produces a variety of plastic products. Some of
these products are standard items that are listed in the company s
catalogue, while others are made to customer specifications. The
company begins the annual budgeting process in late December, when
the managing director establishes targets for the total pound sales and
net 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 pounds. From this budget, sales quotas by product line in
units and pounds are established for each of the corporation s sales
The marketing manager also estimates the cost of the marketing
activities required to support the target sales volume and prepares a
tentative marketing expense budget.
The operations manager uses the sales and profit targets, the sales
budget by product line, and the tentative marketing expense budget to
determine the pound amounts that can be devoted to manufacturing
then forwards to the Production Department the product-line sales
budget in units and the total pound amount that can be devoted to
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 operations manager. 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 director of finance, the operations
manager, the marketing manager and the production 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
manufacturing costs, while the marketing expense and corporate
office expense budgets are cut. The total sales and profit figures
proposed by the managing director 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
operation 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 managing director s profit target
can still 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. The managing director is disturbed that
RDBS has not been able to meet the sales and profit targets. He hired a
consultant with considerable experience with companies in RDBS s
industry. The consultant reviewed the budgets for the past four years.
He concluded that the product-line sales budgets were reasonable and
the cost and expense budgets were adequate for the budgeted sales
and production levels.
As part of his review, the consultant sat with, Ali, the manufacturing
supervisor of RDBS Corporation, and Adam, RDBS s purchasing
manager. Each month, Ali receives a performance report showing the
budget for the month, the actual activity, and the variance between
budget and actual. Part of Ali s annual performance evaluation is
based on his department s performance against budget. Adam also
receives monthly performance reports and he, too, is evaluated in part
on the basis of these reports.
The monthly reports for January, had just been distributed when
the consultant met Ali and Adam in the hallway outside their offices.
The consultant listened to Ali and Adam s chat which went like this:
Scowling, Ali began the conversation, I see we have another set of
monthly performance reports hand delivered by that not very nice
junior employee in the budget office. He seemed pleased to tell me that
I m in trouble with my performance again.
Adam: I got the same treatment. All I ever hear about are the things I
haven t done right. Now I ll have to spend a lot of time reviewing the
report and preparing explanations. The worst part is that it s now the
22nd of February so the information is almost a month old, and we
have to spend all this time on history.
Ali: My biggest gripe is that our production activity varies a lot from
month to month, but we re given an annual budget that s written in
stone. Last month we were shut down for three days when a strike
delayed delivery of the basic ingredient used in our plastic
formulation, and we had already exhausted our stocks. You know
about that problem, though, because we asked you to call all over the
country to find an alternative course of supply. When we got what we
needed on a rush basis, we had to pay more than we normally do.
Adam: I expect problems like that to pop up from time to time “ that s
part of my job “ but now we ll both have to take a careful look at our
reports to see where the changes are reflected for that rush order.
Every month I spend more time making sure I should be charged for
each time reported than I do making plans for my department s daily
work. It s really frustrating to see charges for things I have no control
Ali: The way we get information doesn t help, either. I don t get copies
of the reports you get, yet a lot of what I do is affected by your
department, and by most of the other departments we have. Why do
the budget and accounting people assume that I should only be told
about my operations even though the president regularly gives us pep
talks about how we all need to work together as a team?
Adam: I seem to get more reports than I need, and I am never asked
to comment on them until top management calls me on the carpet
about my department s shortcomings. Do you ever hear comments
when your department shines?
Ali: I guess they don t have time to review the good news. One of my
problems is that all the reports are in pounds and pence. I work with
people, machines and materials. I need information to help me this
month to solve this month s problems “ not another report of the
pounds expended last month or the month before.
Required: Read the following statement and address the questions
below it in the context of RDBS (MIND THE WEIGHT OF EACH
Better budgeting in recent years may have been seen as a movement
from incremental budgeting to alternative budgeting approaches.
However, academic studies (e.g. Who needs Budgets “ Hope and
Fraser, 2003) argue that the annual budget model may be seen as (i)
having a number of inherent weaknesses and (ii) acting as a barrier to
the effective implementation of alternative models for use in the
accomplishment of strategic change.
Critically discuss the above statement in the context of RDBS. In your
analysis, you need to refer to relevant literature in order to:
1. Describe the benefits that can be realized from a budgetary control
2. Identify and critically assess FIVE inherent weaknesses of the annual
budget model irrespective of the budgeting approach that is
applied in RDBS.
3. Discuss how the budgeting process as employed by RDBS
Corporation contributes to the failure to achieve the managing
director s sales and profit targets.
4. Suggest how RDBS Corporation s budgeting process could be
revised to overcome those weaknesses such as the use of the
Format of report
Detailed calculations should be provided in the appendices of the
report. It is recommended that the report should be structured as
Â· a title page
Â· a contents page showing all numbered sections or subsections
and their page numbers
Â· an appropriate Introduction
Â· a sound analysis, discussion and argument
Â· an appropriate Recommendation
Â· Appendices containing the detailed calculations
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