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Sir there was a question that discuss the problems which have occured at Static co due to the previous budgeting process and the improvement which might now be seen through the use of realistic rolling budgets
The answer in kaplan was
The use of fixed budgeting has caused serious problems at Static Co. The fact they
were using inaccurate sales forecast figures led them to invest in a production line
which was not actually needed, even though they knew they were inaccurate. This
unnecessary investment cost them $6m and caused the return on investment to
halve. Had rolling budgets been used at the time, and used properly, the sales
forecasts for the remaining quarters would have been adjusted to reflect a fall in
demand and the investment would not have been made.Sir here I do not understand why they have stated that had rolling budgets been used at the time, and used properly, the sales
forecasts for the remaining quarters would have been adjusted to reflect a fall in demand and the investment would not have been made.? Also they predicted sales $13425 for Q1, however in actually sales amounted to $14096, this was a good indicator na?Can you please explain me the answer which is in examiner report, I could not get it
The actual sales revenue was more than the original budget. However the problems relate to the first 2 paragraphs of the question. One problem is that they were having lower targets in the first three quarters (and then a higher target in the final quarter) so the original budget was not realistic. The other problem is that they invested $6M in a new production line, but this is not being used and so the money was ‘wasted’.
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