Business Accounting

Budgeting: Motivational Issues - Manoil Electronics manufactures and sells electronic components to electronics stores. The controller is preparing her annual budget and has asked the sales group to prepare sales estimates. All members of the sales force have been asked to estimated sales in their territory for each of the organization's 10 major products. The marketing group is paid a salary and a commission based on sales in excess of some target level. You have discovered that the sales manager uses the sales estimates to develop the target levels at which commissions begin. Specifically, the sales manager takes the sales estimate, adds 10%, and the result becomes the sales hurdle level. If sales are less than the hurdle level, no commissions are paid. If sales are above the hurdle level, commissions are paid at varying rates.

Required;

1) What is the motivation of the sales force if they know the relationship between their estimate and the target level of sales?

A budget is used as a tool for planning, coordinating, and resource allocation, as well as to measure performance and serves ultimately to control and influence behavior. In large organization, budgets represent the outcomes of negotiation among individuals. Some individual will do all they can to increase the size of their budgets because they believe a large budget is a symbol of power and control. For instance, the sales manager uses the sales estimates to develop the target levels at which commissions and incentives begin. When they (sales force) know the incentives compensations are tied to the budget, they should play budgeting games in which they attempt to manipulate information and targets to achieve as high a bonus as possible. Generally expected budget should be higher than current performances. Besides to shows their high commitment and contribution to the organizations, it's also attempt to avoid lower management's perceptions of their performance. Moreover, the sales force may want some additional cushion in performance requirements in case there is an unforeseen change in the work environment that affects resources or their ability to meet the budget. If the sales force succeeds in these types of negotiation, they will find it easy to meet or exceed their budgeted objectives.

2) What is the likely consequence of basing the organization's budget on these estimates?

Because of the human factor involved in the entire process, budgets often do not develop in smooth, frictionless manner.At the usual situation, sales forces will understate their target sales for the next year when they know and understand the relationship between estimate and the target level of sales. Generally, company also uses sales information to plan production capacity. Because the sales information is inaccurate, it would lead