Question
Budgetary Slack with Ethical Considerations Norton Company, a manufacturer of infant furniture and carriages, is in the initial stages of preparing the annual budget for
Budgetary Slack with Ethical Considerations
Norton Company, a manufacturer of infant furniture and carriages, is in the initial stages of preparing
the annual budget for next year. Scott Ford recently joined Nortons accounting staff and is interested to
learn as much as possible about the companys budgeting process. During a recent lunch with Marge Atkins, sales manager, and Pete Granger, production manager, Ford initiated the following conversation:
Ford: Since Im new around here and am going to be involved with the preparation of the annual budget,
Id 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 years closing inventories will be, which is sometimes difficult.
Ford: Why does that present a problem? There must have been an estimate of closing inventories in the
budget for the current year.
Granger: Those numbers arent always reliable since Marge makes some adjustments to the sales num-
bers before passing them on to me.
Ford: What kind of adjustments?
Atkins: Well, we dont 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 percent.
Granger: So, you can see why this years budget is not a very reliable starting point. We always have
to adjust the projected production rates as the year progresses; of course, this changes the ending
inventory estimates. By the way, we make similar adjustments to expenses by adding at least 10
percent to the estimates; I think everyone around here does the same thing.
Ford: Since Im new around here and am going to be involved with the preparation of the annual budget, Id 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 years closing inventories will be, which is sometimes difficult.
Ford: Why does that present a problem? There must have been an estimate of closing inventories in the
budget for the current year.
Granger: Those numbers arent always reliable since Marge makes some adjustments to the sales numbers before passing them on to me.
Ford: What kind of adjustments?
Atkins: Well, we dont 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 percent.
Granger: So, you can see why this years budget is not a very reliable starting point. We always have
to adjust the projected production rates as the year progresses; of course, this changes the ending
inventory estimates. By the way, we make similar adjustments to expenses by adding at least 10
percent to the estimates; I think everyone around here does the same thing.
Questions:
- Atkins and Granger have described the use of budgetary slack. Explain why Atkins and Granger behave in this manner. Describe the benefits they expect to receive from the use of budgetary slack. Explain how the use of budgetary slack can adversely Atkins and Granger.
- As a management accountant, Scott believes that the behavior described by Atkins and Granger could be unethical --and that he might have an obligation not to support this behavior. Explain why the use of budgetary slack could be unethical.
- Discuss ways in which organizations can minimize the opportunity of budgetary slack to intrude on the budgetary process.
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