APPLICATION 3 Merchandising Firm Hayes Company

Budgetary Control
Hayes Company is a merchandising firm which deals in buying and selling of bicycles. It deals
in four kinds of cycles:

RightRide

FastRunner

EarthCruiser

Trek 2.1

Budgeted and actual sales data for the RightRide product for the first and second quarters of
2014 are:

The sales report of Hayes first quarter is given below. The right-most column reports the
difference between budgeted and actual amounts.

The report shows that the sales are $1000 under budget an unfavorable result. This difference is
less than 1% of budgeted sales ($1000 / $180000 = 0.0056). Top managements reaction to
unfavorable differences is often influenced by materiality (significance) of the difference. Since
the difference of $1000 is immaterial in this case, we assume that Hayes management takes no
corrective action.
The following table shows the budget report of the second quarter. The report indicates the sales
for the second quarter are $10,500 below the budget. This is 5% of the budgeted sales
($10,500/$210,000). Top management may now conclude that the difference between budgeted
and actual sales requires investigation.

Managements analysis should start by asking the sales manager the causes of the shortfall.
Managers should consider the need for corrective action. For example, management may decide
to spur sales by offering sales incentives to customers or by increasing the advertising of
RightRides. Or if the management concludes that a downturn in the economy is responsible for
the lower sales, it may modify planned sales and profit goals for the remainder of the year.