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Norton Company, a manufacturer of infant furniture and carriages

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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.
Marge Atkins and Pete Granger have described the use of what is sometimes called
budgetary slack.

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REQUIRED:
1. Explain why Atkins and Granger behave in this manner and describe the benefits they
expect to realize from the use of budgetary slack.
2. Explain how the use of budgetary slack can adversely affect Atkins and Granger.
3. 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.
1. Explain why Atkins and Granger behave in this manner and describe the benefits they expect
to realize from the use of budgetary slack.
By lowering sales targets and increasing expense budgets, they hope to have their performance
look better than budget. If they have bonuses tied to "beating budget" then this behavior would
increase the chances and the size of bonuses. The manager may also do this to look good, growth
their area, and increase their power. They may also hope to get promoted if the company appears
to be doing well (beating budget).
2. Explain how the use of budgetary slack can adversely affect Atkins and Granger.
Once the leadership figures out that the managers are padding and low-balling the budget, their
creditability and reputation are shot. This is very difficult to repair. An untrustworthy manager
will have trouble selling their ideas, getting folks to back them during difficult times, and

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competing for resources (no one believes their claims that the project will be great and so forth).
Unethical managers are rarely given more responsibility.
3. 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.
Scott can not permit the routine padding of the budget to gain personal advantage. He clearly is
on notice that the figures are not accurate or even a professional good faith estimate. If he did, he
would be violating the IMA's competence standard
(http://www.imanet.org/PDFs/Public/CMA/Statement%20of%20Ethics_web.pdf) which states
that management accountants must "[p]rovide decision support information and
recommendations that are accurate, clear, concise, and timely." Permitting this unethical practice
to continue would also violate the integrity standard of the IMA ethical code which states that
accountants should "[m]itigate actual conflicts of interest, regularly communicate with business
associates to avoid apparent conflicts of interest" and "[a]dvise all parties of any potential
conflicts."
So, Scott must put an end to this practice but the budget would otherwise be quite inaccurate and
sets up a conflict of interest where the managers are seeking their own benefit rather than the
good of the firm.

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Anonymous
Had to paraphrase some of the content but overall, really useful material.

Anonymous
Just what I needed… fantastic!

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