Question

Budgetary Slack with Ethical Considerations Norton Company, a manufacturer of infant furniture and carriages, is in...

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 Norton’s accounting staff and is interested to

learn as much as possible about the company’s budgeting process. During a recent lunch with Marge Atkins, sales manager, and Pete Granger, production manager, Ford initiated the following conversation:

Ford: Since I’m new around here and am going to be involved with the preparation of the annual budget,

I’d 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 year’s 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 aren’t 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 don’t 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 year’s 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 I’m new around here and am going to be involved with the preparation of the annual budget, I’d 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 year’s 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 aren’t 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 don’t 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 year’s 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:

  1. 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.
  2. 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.  
  3. Discuss ways in which organizations can minimize the opportunity of budgetary slack to intrude on the budgetary process.

Homework Answers

Answer #1

1.     a.     The reasons that Marge Atkins and Pete Granger use budgetary slack include the following:

·They are hedging against the unexpected, thereby reducing uncertainty and risk.

·The use of budgetary slack allows employees to exceed expectations and/or show consistent performance. This is particularly important when performance is evaluated on the basis of actual results versus budget.

·Employees are able to blend personal and organizational goals through the use of budgetary slack as good performance generally leads to higher salaries, promotions, and bonuses.

        b.     The use of budgetary slack can adversely affect Marge and Pete by:

·Limiting the usefulness of the budget to motivate their employees to top performance.

·Affecting their ability to identify trouble spots and take appropriate corrective actions.

·Reducing their credibility in the eyes of management.

·Also, the use of budgetary slack may affect management decision making, as the budgets will show lower contribution margins (lower sales, higher expenses). Decisions regarding the profitability of product line, staffing levels, incentives, etc., could have an adverse effect on Marge’s and Pete’s departments.

2.     The use of budgetary slack, particularly if it has a detrimental effect on the company, may be unethical. In assessing the situation, the specific provisions of the “Standards of Ethical Conduct for Management Accountants” that should be considered are:

        Competence: Provide decision support information and recommendations that are accurate, clear, concise, and timely.

  Integrity: Refrain from engaging in any conduct that would prejudice carrying out duties ethically.

  

  Credibility: Information should be fairly and objectively communicated. All relevant information should be disclosed.

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
lpha Appliances, Inc. Alpha Appliances, Inc. is a major distributor of household appliances. Its customer base...
lpha Appliances, Inc. Alpha Appliances, Inc. is a major distributor of household appliances. Its customer base consists of local retailers who stock a variety of products including appliances. Alpha purchases bulk of its products from China, Mexico, India, and Thailand. The business has been good. In past few months, Jay Adams, VP-Marketing has received numerous complaints from its customers that they have not been receiving supplies on time, costs have gone up, etc. Jay calls a meeting of his sales...
CASE 4–20 Ethics and the Manager, Understanding the Impact of Percentage Completion on Profit—Weighted-Average Method [Course...
CASE 4–20 Ethics and the Manager, Understanding the Impact of Percentage Completion on Profit—Weighted-Average Method [Course Objective B] Gary Stevens and Mary James are production managers in the Consumer Electronics Division of General Electronics Company, which has several dozen plants scattered in locations throughout the world. Mary manages the plant located in Des Moines, Iowa, while Gary manages the plant in El Segundo, California. Production managers are paid a salary and get an additional bonus equal to 5% of their...
Orange County Chrome Company manufactures three chrome-plated products—automobile bumpers, valve covers, and wheels. These products are...
Orange County Chrome Company manufactures three chrome-plated products—automobile bumpers, valve covers, and wheels. These products are manufactured in two production departments (Stamping and Plating). The factory overhead for Orange County Chrome is $213,389. The three products consume both machine hours and direct labor hours in the two production departments as follows: Direct Labor Hours Machine Hours Stamping Department Automobile bumpers 558 803 Valve covers 295 557 Wheels 340 597 1,193 1,957 Plating Department Automobile bumpers 171 1,166 Valve covers 175...
Sign In INNOVATION Deep Change: How Operational Innovation Can Transform Your Company by Michael Hammer From...
Sign In INNOVATION Deep Change: How Operational Innovation Can Transform Your Company by Michael Hammer From the April 2004 Issue Save Share 8.95 In 1991, Progressive Insurance, an automobile insurer based in Mayfield Village, Ohio, had approximately $1.3 billion in sales. By 2002, that figure had grown to $9.5 billion. What fashionable strategies did Progressive employ to achieve sevenfold growth in just over a decade? Was it positioned in a high-growth industry? Hardly. Auto insurance is a mature, 100-year-old industry...
Please read the article and answear about questions. Determining the Value of the Business After you...
Please read the article and answear about questions. Determining the Value of the Business After you have completed a thorough and exacting investigation, you need to analyze all the infor- mation you have gathered. This is the time to consult with your business, financial, and legal advis- ers to arrive at an estimate of the value of the business. Outside advisers are impartial and are more likely to see the bad things about the business than are you. You should...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT