Question

Royal Philips Electronics of the Netherlands reports sales of €24,244 million for a recent year. Assume that the company expects sales growth of 3% for the next year. Also assume that selling expenses are typically 20% of sales, while general and administrative expenses are 4% of sales.

1. Compute budgeted sales for the next year.
2. Assume budgeted sales for next year is €25,000 million, and then compute budgeted selling expenses and budgeted general and administrative expenses for the next year.

Short answer

1. Budgeted sales = €24,971 million
2. The budgeted selling expense is €5,000 million, and the administrative expense is €1,000 million.

Step-by-step solution

Meaning of Participatory budgeting

In participatory budgeting, top-level management involves the bottom-level management in budget creation so that they have a better grasp of the actual situation at the field level, including resource availability, the time required to prepare the budget, and hindrances related to specific aspects, etc.

(a) Computing budgeted sales for the next year

Calculation of budgeted sales for the next year

$\begin{array}{rcl}\text{Budgeted}\text{sales}& =& \text{Netherlands}\text{sales}\times \text{Sales} \text{growth}\text{rate}\\ & =& €24,244\times 103\%\\ & =& €24,971\text{million}\end{array}$

(b) Computing budgeted selling expenses and general and administrative expenses

Calculation of budgeted selling expenses

$\begin{array}{rcl}\text{Budgeted}\text{selling}\text{expense}& =& \text{Budgeted}\text{sales}\times \text{Selling}\text{expense}\text{rate}\\ & =& €25,000\text{million}\times 20\%\\ & =& €5,000\text{million}\end{array}$

Step 4: Calculation of Administrative expense

$\begin{array}{rcl}\text{Administration}\text{expense}& =& \text{Budgeted} \text{sales}\times \text{Administrative} \text{expense}\text{rate}\text{on}\text{sales}\\ & =& €25,000\text{million}\times 4\%\\ & =& €1,000\text{million}\end{array}$