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Norton Company, a manufacturer of infant furniture and carriages, is in the initial stages of preparing the annual budget for the coming year. Scott Ford has recently joined Norton’s accounting staff and is interested in learning 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 in learning 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, and 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.” Required: 1. Marge Atkins and Pete Granger have described the use of 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 and that he may have an obligation not to support this behavior. By citing the specific standards of competence, confidentiality, integrity, and/or credibility from the “Statement of Ethical Professional Practice” (in Chapter 1), explain why the use of budgetary slack may be unethical. (CMA adapted)

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Cornerstones of Cost Management (C...

4th Edition
Don R. Hansen + 1 other
Publisher: Cengage Learning
ISBN: 9781305970663

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Section
BuyFindarrow_forward

Cornerstones of Cost Management (C...

4th Edition
Don R. Hansen + 1 other
Publisher: Cengage Learning
ISBN: 9781305970663
Chapter 8, Problem 43P
Textbook Problem
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Norton Company, a manufacturer of infant furniture and carriages, is in the initial stages of preparing the annual budget for the coming year. Scott Ford has recently joined Norton’s accounting staff and is interested in learning 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 in learning 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, and 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.”

Required:

  1. 1. Marge Atkins and Pete Granger have described the use of budgetary slack.
    1. a. Explain why Atkins and Granger behave in this manner, and describe the benefits they expect to realize from the use of budgetary slack.
    2. b. Explain how the use of budgetary slack can adversely affect Atkins and Granger.
  2. 2. As a management accountant, Scott Ford believes that the behavior described by Marge Atkins and Pete Granger may be unethical and that he may have an obligation not to support this behavior. By citing the specific standards of competence, confidentiality, integrity, and/or credibility from the “Statement of Ethical Professional Practice” (in Chapter 1), explain why the use of budgetary slack may be unethical. (CMA adapted)

1 (a)

To determine

Describe the behavior of sales manager (MA) and production manager (PG) and explain the benefit realize from the usage of budgetary slack.

Explanation of Solution

Budgetary Slack: It is overstated expenses or understated revenue expressed by managers intentionally to take low work pressure, make performance looking better. Slacks are built into budget by managers is called budgetary slack.

Budgetary slack arises when managers deliberately do the following:

  • Underestimate the revenues
  • Overestimate the expenses

Describe the behavior of sales manager (MA) and production manager (PG) and explain the benefit realiz...

1 (b)

To determine

Describe how the use of budgetary slack affects the sales manager and production manager.

2.

To determine

Describe why the use of budgetary slack is unethical.

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Chapter 8 Solutions

Cornerstones of Cost Management (Cornerstones Series)
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