Budgetary Slack

Topic: $,$ Budgeting$/$Standard Setting

Characters: Jennifer, a cost accountant working in a manufacturing division of a large

corporation

Ron, the budgeting and standards supervisor and Jennifer's superior in the

accounting department

Jennifer has been working on next year's budgets for some of the division's products. After

Ron looked over her work, he called her into his office.

Ron: "Jennifer, the budgets look pretty good, except that your estimates of materials costs

seem too low."

Jennifer: "I checked with production and engineering people, and they told me they expect

materials costs to be down. They are trying some new procedures which are almost certain to

reduce materials waste and damage significantly."

Ron: "It's too soon to know how much materials costs will drop, or even if they will be

lower. I want you to redo the budget with materials costs about where they have been for this

year. Then if materials costs are lower next year, the division will beat the budget and look

good. There may be some good bonuses next year."

Jennifer: "Using the current materials quantities puts slack into the budget for next year."

Ron: "Most managers try to get some slack into budgets. There's nothing wrong with that.

Since the new procedures are still experimental, they haven't been reported to corporate

headquarters. This is a perfect opportunity to get an easy budget. I know that's what the

division controller expects and wants. Get the revisions to me as soon as you can."