The percentage-of-sales’ approach to advertising budgets ties budgeting to:
(A) last year’s sales
(B) anticipated sales of the year
(C) next year’s forecast sales
(D) Competitors’ sales
Correct Ans: (C)
Explanation:
The percentage-of-sales approach to setting advertising budgets ties budgeting to next year’s forecast sales. In this approach, businesses allocate a fixed percentage of their projected sales for the upcoming year to fund advertising and promotional activities. By linking the advertising budget to expected sales, this method helps ensure that the company’s marketing efforts are in line with its overall financial goals.
This approach is widely used as it provides a clear and systematic way to determine the advertising budget. However, its limitation is that it assumes sales will directly correlate with advertising spending, which may not always be the case. It does not consider external factors such as market trends, consumer behavior, or changes in competition, which can affect sales independent of advertising efforts. Nevertheless, businesses often use this method to maintain consistency in their advertising spending while forecasting future revenue.
