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. Respond to at least two of your fellow students’ postings.
Explain why Atkins and Granger behave in this manner and describe the benefits they expect to realize from the use of budgetary slack.
They are trying to show the expected revenues on lower side, with an intention not to fall short of target or show their performance better when actual results come as they have already shown the expected revenues on lower side. For example, they were known that the sales will be $100000, but when making budget they showed that it would be $90000, if the actual result is $100000, they can claim that they have sold more than expected and if the actual sale is less than $100000, they can say that they have targeted for only $90000.
Explain how the use of budgetary slack can adversely affect Atkins and Granger.
As the expected sales would have been shown on lower side then it should be, it means that the inventory level would also be on lower side, therefore there is a possibility of shortage of inventory to meet the actual sales. And thus it may affect he performance and also some benefits if related to sales, such as sales commission.
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 chapter 1, explain why the use of budgetary slack may be unethical.
It is unethical, as according to principles of Ethical Professional Practice, the management accountant should be honest and fair. He should be competent to provide support information for decision making which should be accurate and clear. His integrity also depends on mitigation of conflict of interest, which is quite apparent in the case. He should inform the associated parties related to conflict of interest due to misuse of information.