Question

Should functional areas be expected to cut their cost when sales volume falls below budget? Explain your answer

Answer 1

Answer

The functional areas are not always be expected to cut costs. Budget's time frame is short enough so that many costs are relatively fixed. For costs that are fixed, there is little hope for a reduction as a consequence of short-run changes in volume. But at certain times,the functional areas should cut costs should sales volume fall below target when:

. budgeted costs were more than originally targeted sales

. budgeted costs are varying.

. there are discretionary costs that can be delayed or omitted with no serious effect on the department.