The following case study derives from a case in your textbook. Consider the case: Knorwall Company, a manufacturer of baby strollers and accessories, is in the initial stages of preparing the upcoming years annual budget. Lashonda recently joined the companys accounting department and is interested in learning as much as possible about the companys budgeting process. The following conversation occurs during a recent lunch with sales manager Ashley, and production manager, Peter.

Lashonda: Because I'm new around here and will be involved with preparing the annual budget, I am interested in learning how you estimate sales and production numbers.

Ashley: We start 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 develop the best forecast we can.

Peter: I usually take the sales projections as the basis for my projections. Of course, we estimate this year's closing inventories, which is sometimes difficult.

Lashonda: Why does that present a problem? There must have been an estimate of closing inventories in the budget for the current year.

Peter: Those numbers aren't always reliable because Ashley makes some adjustments to the sales numbers before passing them on to me.

Lashonda: What kind of adjustments?

Ashley: Well, we don't want to fall short of our sales projections, so we generally give ourselves a little breathing room by lowering the initial sales projection anywhere from 5 to 10 percent.

Peter: So, you can see why this year's budget is not a very reliable starting point. We always have to adjust the projected production rates as the year progresses, which changes the ending inventory estimates. By the way, we make similar adjustments to expenses by adding at least 10% to the estimates; I think everyone around here does the same thing.

Guided Response: Reply to at least two of your peers by 11:59 p.m. on Day 7 of the week. In your reply to peers,

• Discuss the employees possible motivation for building budgetary slack into their annual budget.
• Explain the potential adverse effects of budgetary slack.
• Recommend three best practices to improve the integrity of the budget development process for your own organization.