Behavioral Aspects of Budgeting; Ethics and the Manager 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 wants 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 rake 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. Required: 1. Marge Atkins and Pete Granger have described the use of what is sometimes called budgetary slack. a. Explain why Atkins and Granger behave in this manner and describe the benefits they expect to realize from the use of budgetary slack. b. Explain how the use of budgetary slack can adversely affect Atkins and Granger. 2. 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 in the Prologue, explain why the use of budgetary slack may be unethical.
Master Budget
A master budget can be defined as an estimation of the revenue earned or expenses incurred over a specified period of time in the future and it is generally prepared on a periodic basis which can be either monthly, quarterly, half-yearly, or annually. It helps a business, an organization, or even an individual to manage the money effectively. A budget also helps in monitoring the performance of the people in the organization and helps in better decision-making.
Sales Budget and Selling
A budget is a financial plan designed by an undertaking for a definite period in future which acts as a major contributor towards enhancing the financial success of the business undertaking. The budget generally takes into account both current and future income and expenses.
Behavioral Aspects of Budgeting; Ethics and the Manager
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 wants 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
Granger: I usually rake 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.
Required:
1. Marge Atkins and Pete Granger have described the use of what is sometimes called budgetary slack.
a. Explain why Atkins and Granger behave in this manner and describe the benefits they expect to realize from the use of budgetary slack.
b. Explain how the use of budgetary slack can adversely affect Atkins and Granger.
2. As a
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