Behavioral Aspects of Budgeting

Norton Company, a manufacturer of infant furniture and carriages, is in the initial stages of

preparing the annual budget for next year. Scott Ford has recently joined Norton's accounting

staff and is interested to learn as much as possible about the company's budgeting process.

During a recent lunch with Marge Atkins, sales manager, and Pete Granger, production manager.

Ford initiated the conversation below. Read the conversation and answer the questions that

follow. Respond to at least two of your fellow students' postings.

Ford:

Since I'm new around here and am going to be involved with the preparation of

the annual budget, I'd be interested to learn how the two of you estimate sales and

production numbers.

Atkins:

We start out very methodically by looking at recent history, discussing what we

know about current accounts, potential customers, and the general state of consumer

spending. Then, we add that usual dose of intuition to come up with the best forecast we

can.

Granger:

I usually take the sales projections as the basis for my projections. Of course,

we have to make an estimate of what this year's ending inventories will be, which is

sometimes difficult.

Ford:

Why does that present a problem? There must have been an estimate of ending

inventories in the budget for the current year.

Granger:

Those numbers aren't always reliable because Marge makes some adjustments

to the sales numbers before passing them on to me.

Ford:

What kind of adjustments?

Atkins:

Well, we don't want to fall short of the sales projections so we generally give

ourselves a little breathing room by lowering the initial sales projection anywhere from

5% to 10%.

Granger:

So, you can see why this year's budget is not a very reliable starting point. We

always have to adjust the projected production rates as the year progresses and, of course,

this changes the ending inventory estimates. By the way, we make similar adjustments to

expenses by adding at least 10% to the estimates; I think everyone around here does the

same thing.

1.What four budgets are involved in the planning process described by Marge and Pete, and what is the purpose of each of the four budgets?

2.What is the value of using a participative budgeting process for the planning and control of a business?

3.Why do you think Marge and Pete use budgetary slack when creating the annual budget - what do they hope to gain?

4.Suggest two ways that company management could address this problem and encourage the creation of a reliable budget for planning and control.