Gear, Inc. A manufacturer of furniture is in the initial stages of preparing the annual budget for the next year. Rob Smith has recently been hired by Gears accounting staff

and is trying to learn as much as possible about the company's budget process. During a recent meeting with Mary Tine, a sales manager and Pete Norton, production manager, Smith starts the following conversation: Smith: Since I am new around here and I am going to be involved with the preparation of the annual budget, I am interested to learn how the two of you estimate sales and production numbers. Tine: We start out very methodically by looking at recent history, discussing what we know about current accounts and potential customers and the general state of consumer spending. Then we add the usual dose of intuition and produce the best forecast that we can. Norton: I usually take the sales projections as the basis for my projections. Of course, we have to make an estimate of what this years ending inventories will be, which is sometimes difficult. Smith: Why does that present a problem? There must have been an estimate of ending inventories in the budget for the current fiscal year. Norton: Those numbers are not always accurate because Mary Tine makes some adjustments to the sales numbers before passing them on to me. Smith: What kind of adjustments? Tine: Well, we do not want to fall short of the sales projections, so we give ourselves a little breathing room by lowering the initial sales anywhere from 5 10 percent. I think everyone around here does the same thing. Based on the foregoing, what budgeting issues do you see in this scenario? How can management address these issues?