Percentage of sales method of setting budget
Perhaps the most commonly used method for budget setting particularly in large firms is the % of sales method in which advtg & promotional budget is based on sales of the product. Management determines the amount by either
1) taking the % of a sales routine. Assigning a fixed amount of the unit product cost to promotion & multiplying this amt by the nos of unit sold.
2) A variation of % of sales method is % of projected future sales as a base.
This method also uses either a straight % of projected sales or a unit cost projection.
One advantage of using future sales as a base is that the budget is not based on last year‘s sales.
As the market changes,mgt must consider the effect of this changes on sales into next year‘s forecast rather than relying on past data.
The resulting budget is more likely to reflect current conditions & be more appropriate.
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