(Appendix) Hans Flims is the controller of Bavaria Labs, a manufacturer and distributor of generic prescription pharmaceuticals. He is currently preparing the annual budget and reviewing the current business plan. The business unit managers of Bavaria Labs prepare and assemble the detailed operating budgets, with technical assistance from the corporate accounting staff. The final budgets are then presented by the business unit managers to the corporate executive committee for approval. The corporate accounting staff reviews the budgets for adherence to corporate accounting policies, but not for reasonableness of the line items within the budget.

Flims is aware that the upcoming year for Bavaria may be a difficult one due to the expiration of a major patent and the loss of a licensing agreement for another product line. He also knows that during the budgeting process, budget slack is created in varying degrees throughout the organization. He believes this slack has a negative effect on the overall business objectives of Bavaria Labs and should be eliminated where possible.

a. Define budget slack.

b. Explain the advantages and disadvantages of budget slack for (1) the business unit manager who must achieve the budget and (2) corporate management.

c. Hans Flims is considering implementing zero-base budgeting at Bavaria Labs. Define zero-base budgeting. Describe how zero-base budgeting could be advantageous to Bavaria Labs in controlling budget slack. Discuss the disadvantages Bavaria Labs might encounter from using zero-base budgeting.

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