Budgetary Slack with Ethical Considerations Karen Bailey was promoted to departm
ID: 2512162 • Letter: B
Question
Budgetary Slack with Ethical Considerations Karen Bailey was promoted to department manager of a production unit in Parkway Industries three years ago. She enjoys her job except for the evaluation measures that are based on the depart ment's budget. After three years of consistently poor annual evaluations based on a set annual bud- get, she has decided to improve the evaluation situation. At a recent budget meeting of junior-level managers, the topic of budgetary slack was discussed as a means to maintain some consistency in budgeting matters. As a result of this meeting, Bailey decided to take the following steps in prepar- ing the upcoming vear's budget: 1. 2. Use the top quartile for all wage and salary categories. Select the optimistic values for the estimated production ranges for the coming year. These are provided by the marketing department. Use the average of the three months in the current year with poorest production efficiency as benchmarks of success for the coming year 3. 4. Base equipment charges (prar?ly depreciation) on replacement values furnished by the pur- chasing department. Base other fixed costs on current cost plus an inflation rate estimated for the coming year. Use the average of the ten newly hired employees' performance as a basis of labor efficiency for the coming vear 5. 6. REQUIRED For each item on Bailey's list, explain whether it will create budgetary slack. Use numerical examples as necessary to illustrate Given the company's use of static budgets as one of the performance evaluation measures of its managers, can the managers justify the use of built-in budgetary slack? What would you recommend as a means for Bailey to improve the budgeting situation in the company? Provide some specific examples of how the budgeting process might be improved a. b. C.Explanation / Answer
Q No 1
Steps taken by Karen will most likely create budgetary slack.
Karen has tried to increase available leeway under her control. Top quartile of wages / use of poorest production efficency benchmarks etc. will not reflect true cost. It will show inflated cost against which real cost is likely to be less resulting into overbudgeting of expenses. For e.g. newly hired employees will have low efficency (time taken by new employee with no experience will take more time as compared to experienced staff to execute same job) considering they are still in learning phase and require some time to develop skills to complete work with greater efficency and speed.
Q No 2
Company should use variable budgets which are based on realistic scenario rather static budget which is traditional approach of budgeting and performance evaluation. Today's business enviornment is dynamic and many factors are outside control of Managers.
Q No 3
Karen is advised to deep dive into reason for poor performance on account of wrong measures being adopted to evaluate performace. Realistic, acheivable and practical benchmarks should be suggested to Management which will be a win-win situation for individual and organisation. New age approach of budgeting like ABC analysis, zero base budgeting should be adopted to increase performance evaluation matrix.
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