Question

Explain the practical problems encountered in using a sales response criterion for budgeting and evaluation purposes.

Answer 1

Sales are generally the main source of income for a business. Budgets are financial plans for the future detailing allocations for revenue. Besides estimating future sales, budgets contain anticipated limits for expenses, such as payroll, rent, utilities, supplies, advertising, insurance and taxes. Thus, a business budget contains multiple subsidiary sections underneath two broad categories -- income and expenses. Budgets can be used to evaluate the number of units produced or services rendered and the labor hours and materials it took for each task. The process involves allocating resources to various compartments within the budget, then going back after the work is complete and comparing budgeted resources with actual usage. The original budget in which estimates are made is called a static budget. A flexible budget can be prepared adjusting the static budget to show actual results. Future budgets can be constructed using data from the flexible budget.

During budget preparation, trade-offs and prioritization among programs must be made to ensure that the budget fits government policies and priorities. Next, the most cost-effective variants must be selected. Finally, means of increasing operational efficiency in government must be sought. None of these can be accomplished unless financial constraints are built into the process from the very start.