Question

For this assignment you are to assume that you are involved in the preparation of your company's master budget. The company's sales team provides information concerning expected unit sales and pricing for use in preparation of the sales budget. Further, you are aware that a portion of the sale team's compensation is based on their ability to meet the sales budget. Write a memorandum to the vice president of finance outlining your concerns about this practice. Include any concerns that you have about potential bias in the information provided by the sales team.

Answer 1

The issue is that, sales team is providing the expected sales for the year and also there certain bonus calculation depends on the ability to meet sales budget.

If you observe closely in this situation, the sales team will overstate the expected sales wantedly and they will try to meet the budget, but the budget is far overstated from the actual demand for the product. The good thing is that, the sales team however try to sell more units to get bonus. But the overstated expected sales will ever be met.

This will result in a huge variences in budget. And the important thing to note here is that, the production of product and the procurement of Raw materials will depend on the sales budget and it will ultimately result in over production and over procurement of raw material. This may have an impact on the profitability of the company.