What is budgeting by percentage of sales method?


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Using this method, the manager multiplies the sales forecast into various expense heads by percentages. The percentage used for each category may be based on the manager’s experience.

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The expense allocation follows the direction of change in sales. e.g. if sales are forecasted to decline, then the budget allocation for all expenses heads will decrease as well.

However, the effectiveness of this method is dependent on the firm having accurate sales forecasts. Despite the limitations, the managers know that if expenses are kept within their percentage budgets, final operations will come out as planned.

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