Question

A business needs cash to survive and grow. The owners have a need to forecast operations, profitability, and their competitive environment.
As the size of your business grows the complexity of this forecasting increases.

Review Exercise 10-59 "Ethics in Budgeting".
-If this occurrence is typical can we trust the numbers?
- What is the likely impact on your budget roll-up?
-Identify and discuss three solutions.
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1. 10-59Ethics in Budgeting/Budgetary Slack 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 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, Scott initiated the following conversation:

Scott:	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.
Marge:	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.
Pete:	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, and that sometimes is difficult.
Scott:	Why does that present a problem? There must have been an estimate of closing inventories in the budget for the current year.
Pete:	Those numbers aren’t always reliable since Marge makes some adjustments to the sales numbers before passing them on to me.
Scott:	What kind of adjustments?
Marge:	Well, we don’t want to fall short of our sales projections, so we generally give ourselves a little breathing room by lowering the initial sales projection anywhere from 5 to 10%.
Pete:	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.

Answer 1

Answer 10-59)

The budgeted numbers should be based on the well defined standards which should be a guiding factor. The budget should not be based on any manager’s view and estimate, but based on standards like sales could be defined on the bases of “Market Share” that company carries. Thus, the repeatedly estimates of Marge’s estimate will disturb the production estimate of the Pete. These numbers on the budget should never be trustable.

If the manager’s views and the estimates are plotted on the budget then the whole would be a bunch of views and estimates, without any factual standardized figure. This is going to eliminate the importance of the budget.

The solutions of all these not trusted budgeted figures are:

1) Standardization of the estimates.

2) Linking all the figures inter-department.

3) Periodical adjustment of the standards according to industry-wise fluctuations.