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 ending inventories will be, which is sometimes difficult.
Danial: Why does that become a problem? There must have been an estimate of ending inventories in the budget for the current year.
Aaron: Those numbers are not always reliable because Zack makes some adjustments to the sales numbers before passing them on to me.
Danial: What kind of adjustments?
Zack: 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%.
Aaron: So you can see why this year’s budget is not a very reliable starting point. We always have to adjust the projections rates as the year progress and, of course, this changes the ending inventory estimates. By the way, we make similar adjustments for expenses by adding at least 10% to the estimates. I think everyone around here does the same thing.
Zack and Aaron have described the use of what is sometimes called budgetary slack.
a. Do you think the behaviour of Zack and Aaron is ethical? Why?
b. In your opinion, what are the reason for Zack and Aaron to behave in that manner?
c. Discuss the effects of budgetary slack on the company.
d. If you were Danial, what would you do to avoid this kind of behaviour among the budget preparers in that company. Discuss
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