Chapter 10 – Strategy and the Master Budget
10-58 (Continued-4)
Cell E8 contains the cost of the new compound, per pound of laundry; cell G99
contains the cost difference: the anticipated fine versus the increased processing
cost attributable to the use of the new compound.
Step Three: Results
In other words, if the price of the new compound were to be reduced from $2.25
per pound of laundry to $2.00 per pound of laundry, with no other changes, then
the owner would be indifferent between incurring the estimated fine and using the
new (higher-priced) compound. Of course, other considerations may affect the
ultimate decision.
4. Operational Changes Needed to Ensure Kaizen Cost Savings
The reduction in labor time might be realized by improving the efficiency of
operations, including a decrease in machine downtime. It is probably the case that
line employees (i.e., operating personnel) would have suggestions for ways to
improve operational efficiency (e.g., changes that would reduce idle time as well as
processing time).
To achieve aggressive cost reductions in labor, however, it might be necessary to
institute some type of employee incentive program.
Savings in electricity consumption may be more difficult to achieve. Some reduction
would likely accompany any planned-for reductions in labor cost. However,
ultimately it may be necessary to invest in more modern technology to improve
electricity consumption. This is particularly true given recent (and anticipated)
increases in utility rates.
Finally, as the present example shows, effective Kaizen budgeting may require
collaborative work with individuals/companies across the value chain. David Duncan
is more likely to achieve his cost-reduction goals by working with his suppliers. As
indicated above, if the cost of the new compound can be decreased by only $0.25
per pound of laundry processed, David would be indifferent (solely on an expected
cost basis) between incurring the fine ($60,000) and the increased processing cost
associated with the use of the new compound ($60,000 as well).
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Chapter 10 – Strategy and the Master Budget
10-58 (Continued-5)
5. Other (qualitative) Considerations that Might Affect the Ultimate Decision:
What impact, perhaps negative, will the Kaizen budgeting approach have on
employee morale?
Will the quest to achieve aggressive levels of cost reduction have a negative
effect on service quality?
Will the use of the new, environmentally friendly cleaning compound have a
beneficial effect on the image of the business and therefore on sales?
Would the use of the new cleaning compound have a beneficial impact on
employee health/working conditions?
If the existing cleaning compound were to continue to be used, would it require
any special handling costs/preventative measures (e.g., employee health and
safety)?
Would incurring a fine (rather than incurring increased operating costs)
negatively affect the image of the business, and therefore future service
demand? (Would negative media coverage reduce demand?)
Does the existing cleaning compound create a hazardous work environment for
employees (the problem is silent on this issue)?
If the existing cleaning compound is considered hazardous to employee well-
being, is there an effect on employee absenteeism?
Duncan’s business essentially consists of two service lines/segments:
commercial and individual. Is there a differential effect on marketing activity for
these two groups? (That is, do these groups differ in their response to either
positive or negative media coverage?)
Would it make more sense for Duncan to invest in new technology, which might
bring the company into full compliance with current emission requirements?
Chapter 10 – Strategy and the Master Budget
10-59 Ethics in Budgeting/Budgetary Slack (40 minutes)
1. a. The reasons that Marge Atkins and Pete Granger use budgetary slack include
the following:
These employees are hedging against the unexpected (i.e., they use slack to
deal with or reduce uncertainty and risk).
Budgetary slack allows employees to “look good,” (i.e., to exceed
actually needs in terms of resources for the upcoming period.
b. The use of budgetary slack can adversely affect Atkins and Granger by:
limiting the usefulness of the budget to motivate their employees to top
performance
affecting their ability to identify trouble spots and take appropriate corrective
higher expenses). Decisions regarding the profitability of product lines,
staffing levels, incentives, etc. could have an adverse effect on Atkins’s and
Granger’s departments.
2. The use of budgetary slack, particularly if it has a detrimental effect on the company,
may be unethical. In assessing the situation, the IMA’s Statement of Ethical
Professional Practice can be consulted (www.imanet.org). This statement notes that
“a commitment to ethical professional practice” includes: overarching principles
(expressions of core values) and a set of standards intended to guide actual conduct
and practice.
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Chapter 10 – Strategy and the Master Budget
10-59 (Continued)
The IMA’s overarching PRINCIPLES include: Honesty, Fairness, Objectivity, and
Responsibility. The list of STANDARDS includes the following: Competence,
Confidentiality, Integrity, and Credibility. The following Standards could be referenced
in conjunction with the use of budgetary slack, as described above:
Competence : Provide decision support information and recommendations that
understanding of the reports, analyses, or recommendations.
Though not asked for in the original CMA exam problem, you might want to discuss
with students how, in practice, they would deal with ethical dilemmas. In its
Resolution of Ethical Conflict statement the IMA provides the following guidance:
1. Discuss the issue with your immediate supervisor except when it appears that
the supervisor is involved. In that case, present the issue to the next level. If
you cannot achieve a satisfactory resolution, submit the issue to the next
management level. If your immediate superior is the chief executive officer or
equivalent, the acceptable reviewing authority may be a group such as the
2.Clarify relevant ethical issues by initiating a confidential discussion with an IMA
possible courses of action.
3.Consult your own attorney as to legal obligations and rights concerning the
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Chapter 10 – Strategy and the Master Budget
10-60 Criticisms of Traditional Budgeting/Incentive Issues (45 Minutes)
Many critics of conventional budgeting procedures cite dysfunctional consequences of
using fixed-performance budgets in managerial compensation contracts. These
individuals believe, among other problems, that such contracts motivate managers and
employees to “game the performance indicator,” that is, to take actions that improve the
performance indicator but are not value-adding to the organization. The following are
selected examples of “gaming behavior”:
managing earnings by pushing expenses into the future (e.g., by delaying
purchases, delay making new hires, delaying an important product-development
initiative, or delaying needed expenditures)
managing earnings by moving future revenues to the present (e.g., by booking
announcing price hikes for the next fiscal year, in an attempt to motivate
increases in end-of-current-year sales
Other dysfunctional consequences of traditional fixed-performance reward systems
include the following:
negotiating low targets and high rewards (i.e., pushing for targets that are
inwardly comfortable yet appear outwardly difficult to achieve)
failure to take appropriate risks by deviating from the budget (i.e., “if it’s not in the
process
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Chapter 10 – Strategy and the Master Budget
10-60 (Continued)
In addition to gaming behavior, some critics suggest that excessive reliance on budget-
based incentive contracts leads to unethical and even fraudulent behavior. This
conclusion is based on the view that in an attempt to meet budgeted performance
requirements (which are tied to compensation), managers resort to questionable, if not
illegal, behaviors. Enron and WorldCom serve as good examples.
Critics of conventional budgeting practices, including those in the Beyond Budgeting
on budgeting activities and activity costs, one might argue that the use of activity-based
budgeting (ABB) decreases some of the negative incentive effects of traditional
budgeting systems. Because of the use of time equations, and therefore greater
specification of resource requirements, the use of time-driven activity-based budgeting
(TDABB) may be particularly useful.
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Chapter 10 – Strategy and the Master Budget
Check Figures: Chapter 10
10-24 1. 37.24%; 2. 18.43%
10-25 Production Budget, 2nd Quarter = 75,600 units; Materials Purchases Budget, 2nd
10-32 1 = $225,000 (May); 2 = $285,379; 3 = $333,876; 4 = $368,250 (net accounts
receivable)
10-33 1. $161,500; 2. $181,500; 3. $163,000; 4a. $179,000; 4b. $108,000
10-38 2. Total Cash Available: I = $381, IV = $533, Year = $1,696; Total
Disbursements: I = $427, II = $426, III = $437, Year = $1,711; Borrowing from
Endowment Fund: I = $54, II = $0, IV = $0; Year = $166; 3. $23,000
10-39 No check figure
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Chapter 10 – Strategy and the Master Budget
10-42 2. Cost-driver rates: Requisition Handling–$12.50 (Jan.), $12.250 (Feb.),
10-43 1. Indirect Labor Support = $50/hour; Computer Support = $1,000/hour; 2.
10-44 1. For February: 95 (from December), 90 (from January); For March: 100 (from
10-47 No check figure
10-48 No check figure
10-51 1 = $1,920,000 (C12); 2 = 11,900 (C12); 3 = $528,800 (budgeted purchases,
10-52 1 = $1,800,000 (C12); 2 = 11,900 (C12); 3 = $342,900 (budgeted purchases,
RM1); 4 = $1,078,500 (budgeted direct labor cost); 5 = $293,472 (budgeted
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Chapter 10 – Strategy and the Master Budget
active policyholders = 94,635; estimated no. of policyholders, beginning of new
year = 80,038; 3. Premiums earned, revised assumption = $114,739,793;
premiums earned, original assumption = $116,462,500; estimated policy
renewals, end of year—revised assumption = 73,090.
10-56 1a. No. of autos insured by National: end of month, Jan. = 14,960,000, Feb. =
10-57 1. 2017: Total operating cash inflows = $591,000; Total Operating cash outflows =
outflows = $603,925; Budgeted ending cash balance, end of 2018 = $10,057.
10-58 1. One-year cost differential = $13,125; 2. $9,599.52 excess year-one operating
10-59 No check figure
10-60 No check figure
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