Classy Boat Company manufactures pleasure boats, which are sold on a
nationwide basis and have been profitable. Classy boats (made in three different
sizes) are known for their style and performance. Annual sales for the past two years
average $10 million. The company has used centrally developed annual budget for
the past five years. The budget is prepared by the controller and is then given to the
president of the company. During the preparation period, the controller obtains from
the regional managers, by telephone, “the best estimate” of how many total boats will
be sold during the upcoming budget year. The controller apportions this total to each
of the three different boat sizes based on sales during the preceding year.
Because of the variances between budgeted and actual sales of the three-
size lines, the president is concerned about the approach used in developing the
sales plan. The annual sales plan has been subdivided by quarters and is not
revised during the year. The controller has suggested that a technical person be
hired to prepare, as he stated, “a series of forecast for the company on a continuing
basis.” The president’s response was, “I am reluctant to add another employee just
to play with numbers all year. I am not interested in spending more of time on the
budget. However, we need monthly budget data on sales and profits. Also, the sales
managers should do a better job with their estimates. ” The controller was inwardly
surprised by the president’s sudden interest. Consequently, the controller decided to
recommend (a) a monthly sales plan and (b) identification of each expense as either
fixed or variable.