Budgetary Slack with Ethical Considerations

Karen Bailey was promoted to department manager of a production unit in Parkway Industries three years ago. She enjoys her job except for the evaluation measures that are based on the departments budget. After three years of consistently poor annual evaluations based on a set annual budget, she has decided to improve the evaluation situation. At a recent budget meeting of junior-level managers, the topic of budgetary slack was discussed as a means to maintain some consistency in budgeting matters. As a result of this meeting, Bailey decided to take the following steps in preparing the upcoming years budget:

1. Use the top quartile for all wage and salary categories.

2. Select the optimistic values for the estimated production ranges for the coming year. These are

provided by the marketing department.

3. Use the average of the three months in the current year with poorest production effciency as benchmarks of success for the coming year.

4. Base equipment charges (primarily depreciation) on replacement values furnished by the pur-

chasing department.

5. Base other fixed costs on current cost plus an inflation rate estimated for the coming year.

6. Use the average of the ten newly hired employees performance as a basis of labor efficiency for the coming year.

Required

a. For each item on Baileys list, explain whether it will create budgetary slack. Use numerical

examples as necessary to illustrate.

b. Given the companys use of static budgets as one of the performance evaluation measures of

its managers, can the managers justify the use of built-in budgetary slack?

c. What would you recommend as a means for Bailey to improve the budgeting situation in the

company? Provide some specific examples of how the budgeting process might be improved.