Currently, Whiz Calculator is estimating the budget for the coming year’s selling expenses as if it is comprised of only fixed expenses. President Riesman finds this method unsatisfactory for two major reasons: 1. It is difficult to judge how good the estimates made by the department heads really are; and 2. Selling conditions fluctuate over time and there is no way to account for these changes in the selling expenses once the budget is set for that year. Thus a new budgeting method is being researched at this time. The new method, if adopted, would be based on both fixed and variable costs.

The fixed costs will be those incurred at the minimum sales volume and the variable costs would be expressed as an amount per sales dollar. President Riesman and the controller understand that basing the selling costs on sales has some limitations, but believe that this method would still be more appropriate than the current model because it would incorporate some variability and allow for budget adjustments. After some initial research, it was determined that the minimum sales volume required to operate is 65% of the total capacity.

The expenses for this capacity were determined using regression analysis, which established that at this percentage of capacity they company should have $250,000 in sales with $2,218 in expenses. The fixed portion of these expenses is $318 and the variable portion is 0. 0076 per sales dollar. From this equation/graph, each selling expense was calculated to form the new budget (see exhibit 3 in the case). It is important to note that this new method does not consider the nature of each selling region, economies of scale for large orders, or consumer behavior.

Additionally, not all highlighted selling expenses are variable to sales and some are only partly variable to sale (e. g. officer’s salary and travel expenses). When comparing the new method figures with the figures from the current method, it is apparent that the new method frequently under budgets for certain expenses (an unfavorable event) that the old method over budgeted for (e. g. office salaries, travel expenses, advertising, social security). Both methods do not budget enough for postage.

The total selling expenses for this month with the new method were $524 over the actual amount, compared to the current method that ended up being $3,581 under the actual amount. Although the new budget seems to put the company in an “unfavorable” position of having to add more money to the budget as they go, it is important to look at how much closer the budgeted amount is to the actual amount spent. From a monthly basis, the new method, that includes both fixed and variable costs, is more precise. However, this is difficult to fully compare as there has been no year-to-date analysis done for the new budget at this time.

From the current analysis it is recommended that the company implement the new method, but also try to dig deeper into what constitutes a fixed or variable expense in response to sales volume. Knowing that they are trying to alter their budgeting procedure to be more accurate, the company should focus on each expense to determine how variable it really is with sales and what other factors may be involved. This will help to uncover causative expenses (i. e. expenses that are directly affected by sales) versus inappropriate correlated expenses (i. e. a certain expense is dependent on another factor that is dependent on sales or another factor).

Whiz Calculator should also try to consider implementing changes to this new method that account for regional differences, economy of scale of large orders, buyer behavior and new research and development expenses. As these are the major pitfalls of the new method, eliminating or minimizing their effects would be desirable (or doing additional research in the case of buyer behavior and R&D). In closing, it is critical that in the near future, Whiz Calculator utilize this new method, but continue to seek new ways to perfect it to better reflect their actual spending.

One final thought to consider is how the company is measuring their efficiency. President Riesman and the controller stress that going over budget is “unfavorable” (as marked by the asterisks in the tables) but do not consider the effects in the long run. Although it may take some time for the new budgeting method to be fully efficient in estimating the company’s selling expenses, the leaders of the company should stress that by doing the research to develop the new method (as well as future methods) they are taking an important step in the right direction by incorporating variability in their expenses.