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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 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 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.
(a) Explain why Atkins and Granger behave in this manner and describe the benefits they expect to realize from the use of budgetary slack.

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abhaydwive123

Budgetary slack is when someone who is responsible for a budget either overestimates expenses or underestimates revenue in order to make the budget easy to obtain. Atkins and Granger have an incentive to do this because they are compensated based on their performance in terms of meeting the budget.

Budgetary slack allows managers a much better chance of "making their numbers," which is particularly important for them if performance appraisals and bonuses are tied to the achievement of budgeted numbers. If the budgeted cost in the company is overestimated, then the expenditures can be shifted to future years. When there is uncertainty about the future possibilities in the case of the creation of a budget for the new product line, then budget slack may provide flexibility to the management while performing business operations.

Budgetary slack could result in a decrease in the efficiency and performance of the employees/managers of the company because, in that case, the employees of the company will work only within their capability of attaining the goals.

In case there is budgetary slack by the understating of the revenue of the organization then due to this understatement of revenue, there are chances that the management will also cut the budgeted expenses of the vital function of the company such as research and development expenses, advertisement expenses, production expenses, or administrative expenses, etc. this reduction of the expenses may also be responsible for hampering the company’s long-term viability.

Budget slack is often viewed negatively as it is sometimes implemented so that managers can meet performance targets, ensuring bonuses or other benefits.

Learn more about the budget at

https://brainly.com/question/6663636

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