Concept explainers
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
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)
Trending nowThis is a popular solution!
Chapter 8 Solutions
Cornerstones of Cost Management (Cornerstones Series)
- You have just been hired as a new management trainee by Earrings Unlimited, a distributor of earrings to various retail outlets located in shopping malls across the country. In the past, the company has done very little in the way of budgeting and at certain times of the year has experienced a shortage of cash. Since you are well trained in budgeting, you have decided to prepare a master budget for the upcoming second quarter. To this end, you have worked with accounting and other areas to gather the information assembled below. The company sells many styles of earrings, but all are sold for the same price—$10 per pair. Actual sales of earrings for the last three months and budgeted sales for the next six months follow (in pairs of earrings): January (actual) 20,000 June (budget) 50,000 February (actual) 26,000 July (budget) 30,000 March (actual) 40,000 August (budget) 28,000 April (budget) 65,000 September (budget) 25,000 May (budget) 100,000 The concentration of…arrow_forwardYou have just been hired as a new management trainee by Earrings Unlimited, a distributor of earrings to various retail outlets located in shopping malls across the country. In the past, the company has done very little in the way of budgeting and at certain times of the year has experienced a shortage of cash. Since you are well trained in budgeting, you have decided to prepare a master budget for the upcoming second quarter. To this end, you have worked with accounting and other areas to gather the information assembled below. The company sells many styles of earrings, but all are sold for the same price - $10 per pair. Actual sales of earrings for the last three months and budgeted sales for the next six months follow (in pairs of earrings): January (actual)..... 20,000 June (budget)..... 50,000 February (actual)..... 26,000 July (budget)..... 30,000 March (actual)..... 40,000 August (budget)..... 28,000 April (budget)..... 65,000 September (budget)..... 25,000…arrow_forwardYou have just been hired as a new management trainee by Earrings Unlimited, a distributor of earrings to various retail outlets located in shopping malls across the country. In the past, the company has done very little in the way of budgeting and at certain times of the year has experienced a shortage of cash. Since you are well trained in budgeting, you have decided to prepare a master budget for the upcoming second quarter. To this end, you have worked with accounting and other areas to gather the information assembled below. The company sells many styles of earrings, but all are sold for the same price—$16 per pair. Actual sales of earrings for the last three months and budgeted sales for the next six months follow (in pairs of earrings): January (actual) 21,200 June (budget) 51,200 February (actual) 27,200 July (budget) 31,200 March (actual) 41,200 August (budget) 29,200 April (budget) 66,200 September (budget) 26,200 May (budget)…arrow_forward
- You have just been hired as a new management trainee by Earrings Unlimited, a distributor of earrings to various retail outlets located in shopping malls across the country. In the past, the company has done very little in the way of budgeting and at certain times of the year has experienced a shortage of cash. Since you are well trained in budgeting, you have decided to prepare a master budget for the upcoming second quarter. To this end, you have worked with accounting and other areas to gather the information assembled below. The company sells many styles of earrings, but all are sold for the same price—$13 per pair. Actual sales of earrings for the last three months and budgeted sales for the next six months follow (in pairs of earrings): January (actual) 20,600 June (budget) 50,600 February (actual) 26,600 July (budget) 30,600 March (actual) 40,600 August (budget) 28,600 April (budget) 65,600 September (budget) 25,600 May (budget) 100,600 The…arrow_forwardYou have just been hired as a new management trainee by Earrings Unlimited, a distributor of earrings to various retail outlets located in shopping malls across the country. In the past, the company has done very little in the way of budgeting and at certain times of the year has experienced a shortage of cash. Since you are well trained in budgeting, you have decided to prepare a master budget for the upcoming second quarter. To this end, you have worked with accounting and other areas to gather the information assembled below. The company sells many styles of earrings, but all are sold for the same price-$16 per pair. Actual sales of earrings for the last three months and budgeted sales for the next six months follow (in pairs of earrings): January (actual) February (actual) March (actual) April (budget) May (budget) Variable: Sales commissions 21, 200 27, 200 41, 200 The concentration of sales before and during May is due to Mother's Day. Sufficient inventory should be on hand at…arrow_forwardYou have just been hired as a new management trainee by Earrings Unlimited, a distributor of earrings to various retail outlets located in shopping malls across the country. In the past, the company has done very little in the way of budgeting and at certain times of the year has experienced a shortage of cash. Since you are well trained in budgeting, you have decided to prepare a master budget for the upcoming second quarter. To this end, you have worked with accounting and other areas to gather the information assembled below. The company sells many styles of earrings, but all are sold for the same price—$13 per pair. Actual sales of earrings for the last three months and budgeted sales for the next six months follow (in pairs of earrings): January (actual) 21,400 June (budget) 51,400 February (actual) 27,400 July (budget) 31,400 March (actual) 41,400 August (budget) 29,400 April (budget) 66,400 September (budget) 26,400 May (budget) 101,400 The concentration…arrow_forward
- Please help solve all question Mega Empire Bhd. is in the inital stages of preparing the annual budget for next year. Danial, has recently joined the company as management accountant and is interested to learn as much as possible about the company’s budgeting process. After the recent meeting with the Sales Manager who is Zack and Aaron as the Production Manager, Danial initiated the following conversation Danial: Since I am new around here and I 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. Zack: 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 the usual dose of intuition to come up with the best forecast we can. Aaron: I usually take the sales projections as a basis for my projections. Of course we have to make estimate of what this year’s…arrow_forwardInformation for Budgeting, Ethics 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 account-ing 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, productionmanager, 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 productionnumbers.”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…arrow_forwardYour friend, Catherine Ross, owns Knockoffs Unlimited, a nationwide distributor of low-cost imitation designer necklaces. She has contacted you for some assistance because the accounting clerk, George Forrest, recently won a sum of money and decided to resign immediately. Catherine knows that you are completing an accounting course at Cape Breton University and hopes you can prepare the cash budget for the upcoming quarter (April, May and June, 2021). Catherine has provided you with the budgets completed by George. She has also provided you with additional information that will assist with the completion of the cash budget. Completed Budgets (April, May, June, and Quarter Total, 2021) please find the required numerical information from the images attached REQUIRED: Prepare a cash budget . Show the budget by month and in total. What will be reported on the budgeted balance sheet at June 30, 2021 for accounts receivable? Supporting calculations required to earn available…arrow_forward
- I have 2 follow-up questions: 1)another team member who is preparing the Budgeted Balance Sheet for the business for the same quarter and has asked you to furnish him with the figures for the expected trade receivables and payables to be included in the statement. Is that a reasonable request? If yes, what should these amounts be? 2) Upon receipt of the budget, the team manager, Hilux James, has now informed you that, in keeping with industry players, the management of Toyota & Sons have indicated an industry requirement to maintain a minimum cash balance of $155,000 each month. He has also noted that management is very keen on keeping the gearing ratio of the business as low as possible and would therefore prefer to cushion any gaps internally using equity financing. Based on the budget prepared, will the business be achieving this desired target? Suggest three (3) internal strategies that may be employed by management to improve the organization’s monthly cash flow and militate…arrow_forwardIs ABC Manufacturing is properly using the budget process to plan for next year's expenses? You have just been hired at ABC Manufacturing, and your supervisor has invited you to sit in on today's budget meeting. You are given a copy of the following proposed budget for next year to review. The budget is being used by ABC to plan for next year. Your supervisor tells you right before the meeting, "We always overestimate because the president always makes us cut the budget by 20%, and besides, I really want to go to that conference in Las Vegas next year." He continued," I have really worked hard this year and put in a lot of overtime so I deserve it." ABC MANUFACTURING Budgeted Income Statement // For the Year Ended Dec. 31, 20XX REVENUE: Sales COST OF GOODS SOLD: Cost of Goods Sold GROSS PROFIT EXPENSES: Advertising Cleaning Insurance Phone Rent Supplies Taxes Training/Education Utilities Wages Total Expenses NET INCOME 9,500 1,800 28,000 3,600 24,000 6,500 10,000 9,800 8,500 150,000…arrow_forwardYou have just started as an apprentice at Nia Artist Studio, a distributor of earrings to various retail outlets located in shopping malls across the country. In the past, the company has done very little in the way of budgeting and, at certain times of the year, has experienced a shortage of cash. Because you are well-trained in budgeting, you have decided to prepare a master budget for the upcoming second quarter. To this end, you have worked with accounting and other areas to gather the information assembled below. The company sells many styles of earrings, but all are sold for the same price-$16 per pair. Actual sales of earrings for the last three months and budgeted sales for the next six months follow (in pairs of earrings): 23,400 June (budget) 29,400 July (budget) 43,400 August (budget) 68,400 September (budget) 103.400 53,400 33,400 31,400 28,400 January (actual) February (actual) March (actual) April (budget) May (budget) The concentration of sales before and during May is…arrow_forward
- Cornerstones of Cost Management (Cornerstones Ser...AccountingISBN:9781305970663Author:Don R. Hansen, Maryanne M. MowenPublisher:Cengage Learning