Budgeting Ethics Written Assignment
S&P Enterprises, a manufacturer of kid friendly furniture, is ready to prepare the annual budget for next year. Stephen Adams is new to the accounting department. To learn more about the budgeting process, he and reaches out to Fred Thomas, the production manager and Danielle Peterson, the sales manager, which results in the following conversation:
Adams: To help me prepare to work on the budget, I’d like to know how you estimate sales and production.
Peterson: We start by considering what we know about our current and potential customers, look at recent history and try to get an understanding of the state of general consumer spending. Based on that, along with our own intuitions, we develop the best forecast we can.
Thomas: I use Danielle’s sales projections as the starting point for mine. Of course, I also have to estimate what this year’s ending inventory will be, which is somewhat of a challenge.
Adams: Why is that a challenge? There must be an estimate of ending inventory in the current year’s budget.
Thomas: I can’t always rely on those numbers because of the adjustments Danielle makes to the sales projections before passing them onto me.
Adams: What do you mean by adjustments?
Peterson: I tend to lower the initial sales projection by somewhere between 5% and 10%. We don’t want to miss our sales target and a little breathing room helps ensure that won’t happen.
Thomas: So, as you can see, this year’s budget does not serve as a great starting point. As the year moves along we adjust projected production rates, which impacts ending inventory. Of course, just like everyone else, we also adjust expenses. I add at least 10% to my estimates to make sure we won’t go over budget.
Writing Requirement
Answer the following questions. Your answer should be at least one page but no more than two (double-spaced, 12- point font). Use college-level English including proper grammar, punctuation, and sentence structure.
Fred and Danielle are obviously including slack in their budgets. Explain why they are doing this and what benefits they expect to receive as a result of using budgetary slack.
How can the use of budgetary slack adversely affect Fred and Danielle?
Stephen is concerned that the actions described may be unethical. Read the IMA’s Statement of Ethical Professional Practice (attached below). Based on the Statement, do you agree with Stephen? Use what you read to help explain why you do or do not agree.
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