Is the use of budgetary slack unethical? Consider a hypothetical conversation between you and the sales and production managers of your company that you recently joined about how the managers estimated their sales and production numbers which drive the budget of your company.

Sales Manager: We have a systematic process that incorporates our recent experience and what we know about our customers and the economic conditions to develop initial estimates. Then we add that usual dose of intuition to come up with the best forecast we can.

Production Manager: The sales projections that are given to me are the basis for my production planning. Of course, we have to make an estimate of what this year’s ending inventories will be, which is sometimes difficult.

You: Why does that present a problem? There must have been an estimate of ending inventories in the budget for the current year.

Production Manager: Those numbers aren’t always reliable, since Sales makes some adjustments to the sales numbers before passing them on to me.

You: What kind of adjustments?

Sales Manager: Well, my department is evaluated on how well we hit the sales targets and we don’t want to fall short of the sales projections, and so we generally give ourselves a little breathing room by lowering the initial sales projection anywhere from 5% to 10%.

Production Manager: 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.

Required:

1. The practice followed by the managers as described illustrates budgetary slack.

a. Why do managers behave in this manner? Describe the benefits they expect to realize from the use of budgetary slack.

b. Explain how the use of budgetary slack can adversely affect these managers.

2. As a professional accountant, explain why the use of budgetary slack may be unethical. When formulating your response, consider the following enabling competencies expected of a professional accountant: professional competence; integrity; and objectivity. You may refer to any published Code of Professional Conduct from professional accounting organizations like CPA-Canada or one of its legacy organizations like CGA-Canada or CMA-Canada or the AICPA in the United States.