Question 2

(Suggested Time: 65 Minutes)

Begining December, Aisea is appointed as the new accounts manager at the Bank of Fiji. Her first task is to participate in the budget preparation task for next year and to estimate the number of new accounts she will generate during next year. Bank of Fiji has experienced a 12% increase in its number of bank accounts over each of the past four years and an increase of 3% in the number of closed accounts for the past three years.

Aisea is paid a salary of $75,000 plus a bonus of $40 for every new account she generates above the budget figure. For instance, if the annual budget calls for 400 new accounts and 460 new accounts are achieved then Aiseas bonus will be $2,400 (60 x $40). Aisea is optimistic that client growth will be as per recent years' expectations. Taking that into account, she decided to submit a budget projection of 1,500 new accounts for the coming year.

In the year just ended on 31st December, the bank had 15,000 accounts.

Required:

Your consulting firm has been hired by the managing director of the bank to make recommendations for improving its operations.

1. Discuss how the bonus program may encourage budgetary slack? [7.5 marks]

2. How might the bank reduce the incentive to create budgetary slack? [7.5 marks]

Note: in answering both parts 1 and 2, relate your discussion with the case facts.