Question

It is fall 2XX6 and Marge Atkins, the new management accountant at Norton Company, a manufacturer of baby furniture, is working on the 2×X7 budget Scott Ford, the northeast sales manager, whose sales team will easily meet its $2,000,000 sales budget this year, has projected sales of $2,200,000 in 2XX7. But in conversations with individual salespeople, Atkins learns that each salesperson is expecting to makes sales of at least 20% more in 2XX7 than in the current year. When Atkins asks Ford about this he says "Well, not meeting projections is so bad for the morale of the sales team ..... and you know how the top brass froths at the mouth when we miss our target by even a little bit ... so, we give ourselves a little breathing room. "Intrigues, Atkins investigates further and finds that Pete Granger, the production manager, makes similar adjustments, padding estimated costs by about 10% to come up with the budgeted costs.

Required: As a management accountant, should Marge Atkins take the position that the behaviour described by Scott Ford and Pete Granger is unethical? Explain

Answer 1

Marge Atkins should consider the practice of budgetary slack displayed by Scott Ford and Pete Granger as unethical due to its long-term negative impact on decision-making, resource allocation, and trust within the company. Inflating costs or reducing sales forecasts in budgets can lead to serious consequences, and Marge should foster an ethical culture with accurate financial reporting.

Step-by-step explanation:

Marge Atkins, as a management accountant at Norton Company, should consider the ethical implications of the behavior described by Scott Ford and Pete Granger. According to ethical and professional accounting standards, budgets should reflect realistic and honest projections, not inflated figures that can mislead stakeholders and management. A practice known as budgetary slack, which involves deliberately understating sales or overstating costs, may provide short-term benefits such as meeting targets or having a cushion but can lead to poor decision-making, resource misallocation, and damage to the integrity of financial reporting in the long term.

Creating a budget with intentionally lowered sales estimates or increased cost projections can also have long-term consequences, including undermining trust within the organization, negatively impacting morale if the true potential is consistently underrepresented, and potentially affecting the company's strategic planning and investment decisions based on these inaccurate figures.

Therefore, Marge Atkins should address this issue with the appropriate level of concern, promoting an ethical culture that advocates for accurate and responsible financial reporting. She should encourage open and honest discussions around budget forecasts and stress the importance of integrity in the budgeting process to Scott Ford, Pete Granger, and other managerial staff.