Norton Company, a manufacturer of infant furniture and carriages, is in the initial stages of preparing the annual budget for next year. Scott Ford has 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 conversation below. Read the conversation and answer the questions that follow.
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 ending inventories will be, which is sometimes difficult.
Ford: Why does that present a problem? There must have been an estimate of ending inventories in the budget for the current year.
Granger: Those numbers aren’t always reliable because 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%.
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 and, of course, this 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.
a. Marge Atkins and Pete Granger have described the use of what is sometimes called budgetary slack.
i. Explain why Atkins and Granger behave in this manner and describe the benefits they expect to realize from the use of budgetary slack.
ii. Explain how the use of budgetary slack can adversely affect Atkins and Granger.
b. As a management accountant, Scott Ford believes that the behavior described by Marge Atkins and Pete Granger may be unethical. By referring to the IMA’s Statement of Ethical Professional Practice, explain why the use of budgetary slack may be unethical.