Incremental budgeting system

31 Sauce Co (6/12 / 12/09, amended)
Sauce Co manufactures and sells cartons of cooking sauces, which deteriorate over time and must be used within three months. Over the last two years, Sauce Co has experienced all kinds of problems. The financial and sales directors believe these to be a result of persistently unrealistic sales targets imposed by the managing director, who makes forecasts based on his own subjective and overly optimistic views about future sales. Production volumes are currently based on anticipated sales rather than actual orders.
Whilst an incentive scheme is in place for employees, the company has not hit its targets for the last three years, so
no bonuses have been paid out.
Required
(a) Discuss the likely impact that the budgeting style and inaccurate sales forecasts have had on the staff and business of Sauce Co. (10 marks)
(b) Explain what is meant by the controllability principle and its implications for a company such as Sauce Co. (4 marks)
Incremental budgets take a previous period’s actual figures, adjust for any known changes to operations and then add a % for expected inflation in order to set the next period’s budget.
Required
(c) Describe two advantages and two disadvantages of Sauce Co using incremental budgeting as its main forecasting technique. (6 marks)
(Total = 20 marks)
I did it like this:
31: part a:
Staff: they will be demotivated because their efforts are not giving the results expected by the top managers and they are blamed for it. They are not getting bonuses even though they are doing their best. They may lose interest in the work which could effect the quality of the product. They may leave the work which will effect the efficiency.
Business: the business will have serious cash problems sin
ce they get less than expected. If employees lose interest and quality of product go down the business will lose customers hence sells. If employees started to leave the job less products will be made that will automatically decrease sells and due to less profits there will be less savings which could make the company go to bankruptcy.
Part b:
Controllability principle means the manager will be held responsible only for the things on which he have some control over.
Sales and financial managers should not be held responsible for variances because they are not the ones who made the budgets so they can not change it and they have no control over the price trends.
Part c:
Advantages: Incremental budgeting system is fast. The top managers are experienced in making the budgets and few people are involved in so less time is wasted on agreeing and disagreeing so they can make all budgets in less time. This also makes it cheaper. Incremental budgeting system is used in business with stable costs and they don’t have to worry about changes in the cost.
Disadvantages: Incremental budgeting system makes budgets by looking the previous year so they end up with same mistakes as the previous ones. They are not aware of the price trends like material costs, labour rates etc. and they may end up buying the things which could have been made inside in less cost.
Is it right?