(a)

Quarter                Actual volume          Centred moving         Seasonal percentage

of sales average

’000 units                 ’000 units

2010

Q3                       900

Q4                       1,100

2011

Q1                       1,200                  1068·75                1·1228

Q2                       1,000                  1112·50                0·8989

Q3                       1,050                  1162·50                0·9032

Q4                       1,300                  1206·25                1·0777

2012

Q1                       1,400                  1243·75                1·1256

Q2                       1,150                  1287·50                0·8932

The average seasonal variations can now be calculated to see whether any adjustment to the percentages is required, since they must be 4·0 in total.

Since the averages total 4·0057, each one needs to be reduced by 0·0016

The difference of 0·0001 is due to rounding and can be ignored.

The average trend of the centred moving averages is (1,287·5 – 1,068·75)/5 = 43,750 units.

Therefore forecast centred moving average for Q3 in 2012 = 1,287,500 + 43,750 = 1,331,250.

Adjusted for seasonal variation: 1,331,250 x 0·9042 = 1,203,716·25 units.

Forecast centred moving average for Q4 of 2012 = 1,287,500 + (2 x 43,750) = 1,375,000.

Adjusted for seasonal variation = 1,375,000 x 1·0785 = 1,482,937·5 unit

(b) Likely impact on the staff and business

Staff – Since the budgeting style has been an imposed one rather than a participative one, morale amongst staff is likely to be low, since they have not been involved in the process at all.

– Additionally, since sales targets appear to be unachievable and staff have not received performance related bonuses, staff are not motivated to try and achieve targets since they feel like they are impossible to achieve. Team spirit will be low and an atmosphere of ‘doing the bare minimum’ is likely to exist.

– Since budgets are imposed from the top down, the culture will not be one in which operational management generate ideas, as they will feel like they are not appreciated and that their views are not taken into account.

Business – Since sales levels are overestimated, production volumes must also be too high. As well as this leading to high inventory costs because actual sales are then lower than expected, since the product is also perishable, waste levels have probably been high. These will be significant costs to the company.

– Also, when customers do receive their goods, it is likely that they will be close to their expiry date, since they will have been taken from inventory that has been held for some time. This will be frustrating for customers because products may then perish before the end customer gets to use them. Also, it is likely that a sauce that is two months old does not taste as good as a sauce that is only a few days old. Both of these factors may be causing damage to the company’s reputation.

– Too many staff are probably being employed in the business, bearing in mind that the staffing levels will be related to forecast production volumes. One can only assume that whilst initially, production volumes relate to the forecast, as it becomes apparent that sales are not as high as anticipated and inventory levels increase, production slows down. Staff are probably sitting idle for some of the time, which is demotivating for them and costly to the company.