Managerial Accounting

Topic Requirements:
Below are my answers to the two requirements for the topic on Profit Planning.
1. Ethics Challenge
Norton Company, a manufacturer of infant furniture and carriages, is in the initial stages of
preparing the annual budget for next year. Scott Ford has recently joined Norton’s accounting staff
and is interested to learn as much as possible about the company’s budgeting process. During a
recent lunch with Marge Atkins, sales manager, and Pete Granger, production’s manager, Ford
initiated the following conversation.
Ford: Since I’m new around here and 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.
Atkins: 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
that usual dose of intuition to come up with the best forecast we can.
Granger: I usually take the sales projections as the basis for my projections. Of course, we have to
make an estimate of what this year’s ending inventories will be, which is sometimes difficult.
Ford: Why does that present a problem? There must have been an estimate of ending inventories
in the budget for the current year.
Granger: Those numbers aren’t always reliable because Marge makes some adjustments to the
sales numbers before passing them on to me.
Ford: What kind of adjustments?
Atkins: 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%.
Granger: 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. Marge Atkins and Pete Granger have described the use of what is sometimes called budgetary
slack.
a. Explain why Atkins and Granger behave in this manner and describe the benefits they expect to
realize from the use of budgetary slack.
In the first place, what is budgetary slack. Budgetary slack is a cushion created in a
budget by management to increase the chances of actual performance beating the budget.
Budgetary slack can take one of two forms: an underestimate of the amount of income
or revenue that will come in over a given amount of time, or an overestimate of the expenses that
are to be paid out over the same time period.
 Budgetary slack is generally frowned upon because the perception is that managers care
more about making their numbers to keep their seats and gaming the executive compensation
system rather than pushing company performance to its potential. They are trying to avoid
uncertainty or risks in the future, to show good performance and it is more of personal
reasons/goals due to achieving their targets leading to increase in salaries, promotions, and
additional benefits attached to it.

b. Explain how the use of budgetary slack can adversely affect Atkins and Granger.
Adverse effects:
1. Since they are aware that the budget is safe by its numbers in the future, they tend to just
do it over and over. Doing this could limit the usefulness of the budget in motivating them to perform
well in their job.
2. It is also difficult to check if there are problems in the budget due to the slacks and so it
will also be difficult to take appropriate actions if in case.
3. If problems arise in the future then the 2 managers might lose their credibility in the eyes
of the management.
4. More importantly, the budgetary slack might affect the decision-making of the
management in all aspects of the company.
2. As a management accountant, Scott Ford believes that the behavior described by Marge Atkins
and Pete Granger may be unethical. By referring to the IMA’ Statement of Ethical Professional
Practice, explain why the use of budgetary slack may be unethical.
While it’s true that sometimes the management is unsure of the numbers in the budget so
they tend to create budgetary slack but the best way to avoid such is to install a management team
with integrity and credibility to avoid unethical issues. It is to refrain from engaging in any conduct
that would prejudice carrying out duties ethically and to provide all relevant information that could
reasonably be expected to influence an intended user’s understanding of the reports, analyses, or
recommendations especially that the issue is regarding budget wherein a lot of users might be
affected with the numbers that are to be reported on it. Decisions rely and may arise from the mere
use of the budget which is supposedly be a guide for a company to meet their goals so budget
preparations should be taken seriously and with utmost care, integrity and credibility.

2. Research and Application

The questions in this exercise give you an appreciation for the complexity of budgeting in a large
multinational corporation. To answer the questions, you will need to download the Procter &
Gamble (P&G) 2005 Annual Report at www.pg.com/investors/annualreports.jhtml and briefly refer to
“Item 2: Properties” in P&G’s Form 10-K for the fiscal year ended June 30, 2005. To access the
10-K report, go to www.sec.gov/edgar/searchedgar/companysearch.html. Input CIK CODE 80424
and hit enter. In the gray box on the right-hand side of your computer screen define the scope of
your search by inputting 10-K and then pressing enter. Select the 10-K with a filing date of August
29, 2005. You will also need to briefly refer to Macy’s Inc.’s Form 10-K for the fiscal year ended
January 29, 2005. Macy’s CIK code is 794367 and its filing date is March 28, 2005. You do not
need to print any documents to answer the questions.
Required:
1. What is P& G’s strategy for success in the marketplace? Does the company rely primarily on a
customer intimacy, operational excellence, or product leadership customer value proposition? What
evidence supports your conclusion?
The Procter & Gamble Company applies its generic strategy to achieve competitive
advantage in the consumer goods industry by giving emphasis is on product quality and value.
Moreover, the company applies intensive growth strategies alongside its generic strategy. These
intensive strategies facilitate Procter & Gamble’s growth in terms of market performance.
Considering the tough competition in the consumer goods market, it is essential that these intensive
growth strategies are effective and relevant to the current market conditions affecting Procter &
Gamble. Moreover, P&G has improved on cost productivity structure in order to be able to make
investments and to generate strong free cash flow. P&G aspires to be the leading consumer
products company in sales, profitability, market capitalization, shareholder return, and in each of our
core strengths. They are creating sustainable leadership advantages in branding, innovation, go-to-
market capability, and scale.
I can say that P&G did not only concentrate on only one but a combination of these three,
customer intimacy, operational excellence, or product leadership customer value proposition in
achieving its goal. The 1993 HBR article ‘Customer Intimacy and Other Value Disciplines’ argued
that every company had to become champions of one of three value disciplines — operational
excellence, customer intimacy, or product leadership. Lafley is Chairman and CEO of Procter &
Gamble while Martin is Dean of Rotman School of Management in Toronto, in their book Playing to
Win: How Strategy Really Works, they stated that Strategy is not complex but it is hard. It’s hard
because it forces people and organizations to make specific choices about their future—something
that doesn’t happen in most companies.

2. What business risks do P&G face that may threaten its ability to satisfy stockholder
expectations? What are some examples of control activities that the company could use to reduce
these risks? (Hint: Focus on page 28 of the annual report).
Based on the 2005 Annual Report, the risks that P&G faced that may threaten its ability to
satisfy stockholders are
a. Cost Pressures due to fluctuations particularly due to changes in commodity prices, cost
of labor, foreign exchange and interest rates. Some of the control activities to manage fluctuations
includes pricing actions, cost savings projects, sourcing decisions and hedging transactions. They
must also manage currency, maintain key manufacturing and supply arrangements and implement,
achieve and sustain cost improvement plans like outsourcing projects.
b. Global Economic Conditions like terrorist activity and political unrest that may result in
business interruption, inflation, deflation or decreased demand for their products. Control activities
includes ability to manage continued global political and/or economic uncertainty in their
geographical markets.
c. Regulatory Environment including changes in laws, regulations and the related
interpretations in their business world. These may include environmental, competitive and product-
related laws, and changes in accounting standards and taxation requirements. Control activities to
impact results includes managing regulatory, tax and legal matters and resolve pending matters
within current estimates.
3. What were P& G’s quarterly net sales for the fiscal year ended June 30, 2005? What were
Federated Department Stores’ quarterly net sales for 2004? (Hint: see page 79 of its 10-K.) How
does P&G’s quarterly sales trend compare to Federated Department Stores’ quarterly sales trend?
Which of the two quarterly sales trends is likely to cause greater cash budgeting concerns? Why?

3.1 P & G’s quarterly net sales for the fiscal year ended June 30, 2005
September 30th$13,744,000,000.00
December 31st $14,452,000,000.00
March 31st $14,287,000,000.00
June 30th $14,258,000,000.00
TOTAL $56,741,000,000.00

3.2 Federated Department Stores’ quarterly net sales for 2004

March 31st $3,517,000,000.00

th
June 30 $3,548,000,000.00
September 30th$3,491,000,000.00
December 31st $5,074,000,000.00
TOTAL $15,630,000,000.00

3.3 How does P&G’s quarterly sales trend compare to Federated Department Stores’
quarterly sales trend?
In the second quarter of 2005, there is an increase in sales of $708,000,000.00 or
5.15% in P&G’s quarterly sales but decreased in the next 2 quarters by only a minimal amount of
sales. On the other hand, Federated Department Stores’ sales is increasing the whole year round
as proven by the sales per quarter. The last quarter sales increased by more than $ 1.5M as
compared to the previous quarter sales.

4. Describe the scope of P& G’s business in three aspects-physical facilities, products, and
customers. More specifically, how many manufacturing facilities does P&G operate globally? What
are P&G’s three Global Business Units (GBUs)? Which of P&G’s 17 “billion dollar brands” are
included in each of these GBUs? How many brands does P&G offer in total and in how many
countries do they sell these brands? How many countries does P&G’s Market Development
Organization operate in?
Describe P&Gs business in 3 aspects
a. Physical Facilities
P&G’s operates 33 manufacturing plants in 21 different states in the US and 91
manufacturing facilities in 42 other countries around the world.
Property, Plant and Equipment has a record of $14,332,000.00 net of depreciation in 2005.
a balanced geographic presence
b. Products
a uniquely balanced combination of businesses and brands
Innovative products
Products and services are branded and of superior quality and value
Products are sold to delight consumers with better performing products
P&Gs markets over 300 branded products in more than 160 countries
P&G is the largest consumer products company (14 corporations)
Products are sold by retails operations including mass merchandisers, grocery stores,
membership club stores, drug store and high frequency stores
c. Customers
a balanced mix of customers
P&Gs focus is to delight consumers
P&Gs household care mission to make everyday lives of consumers a little brighter and
keep families healthy
P&Gs beauty focused on delivering consumer understanding that reaches beyond functional
needs to connect at a deeper emotional level.

How many manufacturing facilities does P&G operate globally?

We have about 35 manufacturing plants handling production for products around the world

What are P&G’s three Global Business Units (GBUs)? Which of P&G’s 17 “billion dollar
brands” are included in each of these GBUs?
The 3 Global business Units of P&G and its 17 “billion dollar brands” are:

P&G Beauty (Head & Shoulders, Olay, Pantene, Wella)

P&G Health and Well-being (Actonel, Always, Crest, Oral-B)
P&G Household Care (Ariel, Dawn, Downy, Duracell, Gain, Tide, Bounty,
Charmin, Pampers)
How many brands does P&G offer in total and in how many countries do they sell these
brands?
P&Gs markets 300 branded products in more than 160 countries

How many countries does P&G’s Market Development Organization operate in?
P&G’s Market Development Organization operate in over 80 countries

5. Describe five uncertainties that complicate P&G’s efforts to accurately forecast its sales and
expenses.
1. Raw material cost variations
2. Global economic and political condition
3. Changes in the regulatory environment
4. Competitor advertising and pricing
5. Unforeseen challenges

6. P&G’s annual report briefly discusses the acquisition of Gillette (see pages 10-11). It
acknowledges that Gillette has some different cultural norms in terms of how it defines
accountability and communicates internally. Although not discussed in the annual report, how could
differences in two organization’s budgeting practices be responsible for these types of divergent
cultural norms?
Well, we cannot do away with this situation of differences but in an organization or a
company, they have to be more focused on their vision and mission and not on their differences. To
fit it, they have to work in the spirit of collaboration. They have to focused on delivering the goal by
working as a team. They have to open and transparent in every aspect to build credibility and trust
among themselves. It is a challenge but it also encourages commitment to excellence and success
in an organization.
3. Budget System in the Philippine Government

Look for at least 5 related studies on Issues/Challenges/Problems encountered in the Budget

System in the Philippine Government.

3.1 Prepare a summary in tabular form containing the following: Authors and dates,
Issues/Challenges/Problems Identified, Solutions/Recommendations to address the
Issues/Challenges/Problems Identified.
Reasons for
Issues/Challenge
Issues/Challenge Solutions/Recom
Reference s/Problems
s/Problems mendations
Encountered
Encountered
https://prezi.com/yx0sm3ql6r_g/ Limitations of the 1. It provides no 1. Adopting a
government-budgeting- one year budgeting mechanism for the Pragmatic
expenditures-issues-problems/ system government to Budgeting System
Venus Paulino, July 26, 2014 control its budget
and expenditure 2. Having a
beyond a two-year Medium-Term
time horizon Fiscal Plan
2. Makes it difficult
to develop a 3. Good
system for Governance
projecting the
budget implications
of legislators’
proposals for
spending

3. It provides no
systematic way of
projecting or
managing the
expenditure
requirements of
ongoing and new
programs of
government
agencies
https://prezi.com/k1okvexeh2uh Issue #1: Lack on 1. Budgets and 1. DBM is
/issues-and-concerns-of-the- Medium-term their underlying implementing a
philippine-national-budgeting/ Budget Framework fiscal forecasts Two-Tier Budgeting
(MTBF) Approach (2TBA)
should provide a
Ariane N. Salomes, January 5, which will introduce
Issue #2: Budget clear statement of separate reviews
2018
documentation the government’s for ongoing and
provides budgetary approved programs
information objectives and vis-à-vis new or
regarding the policy intentions expanded ones to
objectives and and give a better focus
results achieved comprehensive, on each type of
under each major program.
government policy timely, and credible
area. But, projections of the Public Financial
government evolution of the Management
agencies are more outcomes can
public finances.
concerned with greatly improve by
documenting 2. Medium- term adopting a forward-
results. Budget Framework looking perspective
is a framework on budgeting.
Issue #3: Budget integrating fiscal
credibility is
policy and Policies are
undermined by the
complexity and budgeting over the ensured through
the Development
large flexibility of medium term by
Budget
the annual budget linking a system of Coordinating
framework which aggregate fiscal Committee (DBCC)
resulted in the non- forecasting to a
rating of the disciplined process
principle on the of maintaining
supplementary
detailed medium
budget.
term budget
Issue #4: The estimates by
Institutional ministries reflecting
Framework is existing
fragmented government
policies.
Issue #5: The
Political economy 3. The Philippines’
budget system has
Issue #6: Budget an unusually large
execution is a amount of
particular concern, complexity and
together with flexibility built into
underspending and it. 
slower
disbursement.
4. the annual
budget law has
Issue #7: Difficulty
become an
in adopting the
imperfect indicator
Two-tier Budgeting
of the
government’s
priorities for
resource allocation
and service
delivery, as budget
outturns differ
noticeably from the
budget law.

5. Public
expenditure
management is
characterized by a
generally low
 efficiency of
spending. 

6. The Philippines
has a complex
budget structure,
https://www.oecd.org/gov/budg Issues on Tax Tax evasion and through the “lateral
eting/48170279.pdf Compliance and complicit corruption attrition system”
corruption in the revenue- which
Jon R. Blondal, 2010 collecting agencies institutionalizes a
is massive in the system of
Philippines. incentives for
revenue-collecting
officials who meet
or exceed targets.
This system is
highly
controversial.
Management Services Report Issue on the The government is Fast tract the
No. 2005-05 Special Study effectiveness of the operating under establishment of
budget allocation deficit budgets appropriate and
July 5, 2006, Commission on system of the relevant criteria for
Audit government. allocating funds

Limit the proposed

current operating
expenditures to the
level of the
expected national
government
revenue to reduce
budget deficits

Coordinate with the

Government
Accounting and
Financial
Management
Information
Systems (GAFMIS)
of the Commision
on audit for the
generation of
reports that would
help provide
information for the
evaluation of
budget approaches
and expenditure
management
reforms
 https://www.slideshare.net/chali Budget Deficit Indirect tax Reduce fiscal
emolina/issues-and-problems- collection and imbalance and
in-fiscal-policy-and- Inefficiency in focused on improve tax
development Budget Allocation government collection through
spending on the introduction of
Rosalie A. Molina Tax Collection economic services the 1986 tax
and infrastructure Reform Program
Pork Barrel development and the value
added tax

Enactment of the
expanded Value
Added Tax Law

3.2 Based on 3.1, do you agree or disagree with the reasons and solutions presented? Why?
Please provide your justifications by citing related literature or studies.

The solutions or recommendations provided must have underwent thorough discussions

before it was presented for approval. I couldn’t disagree on these solutions.

Regarding the Pragmatic Budgeting System, it is a system that recognizes the uncertain
nature of fiscal resources and economic development. The Elements of a Medium-Term Fiscal Plan
is a framework for managing the deficit and allowing the government to allocate more resources to
programs that demonstrate effectiveness in poverty reduction and for Governance, it should be
advocated through legal provisions for it to improve to good governance. The budget should
embody the country’s strategy for social and economic development. It should not be merely a
compilation of financial requirements for ongoing programs, ew programs, and projects but should
enable the reallocation of resources toward what the society needs and prioritizes. ( Paulino ,2014,
Government Budgeting & Expenditures Issues & Problems,
https://prezi.com/yx0sm3ql6r_g/government-budgeting-expenditures-issues-problems/).

The two-tier approach will make budget preparation more strategic and will strengthen fiscal
discipline. It is designed to support agencies to develop affordable and sustainable budgets that
direct resources to the highest social and economic priorities and improve the efficiency and
effectiveness of public services. The 2TBA enhances the ability of the government to prioritize and
manage spending, and engages the President and the Cabinet in setting the strategic direction and
distribution of unallocated resources. (DBM, 2017, Guide to the Two Tier Budget Approach, A Tool
For Agencies,
https://www.dbm.gov.ph/images/pdffiles/GUIDETOTHETWOTIERBUDGETPROCESS.pdf).

The Lateral Attrition Law, or Republic Act 9335, was enacted in 2005 with the aim of
boosting revenue through an incentive system where tax collectors who exceed expectations are
given incentives accordingly, whereas those who fall behind their targets are imposed penalties.

Under this RA 9335, officials and employees of the BIR and BOC who exceed their respective
revenue targets of the year would be given incentives in proportion to their relative contribution to
the aggregate amount of the excess collection. On the other hand, those who fail to meet their
collection targets by at least 7.5 percent will be removed from office, subject to civil service laws,
rules and regulations and in compliance with substantive and procedural due process. It is a system
that gives employees what they deserve. (Reganit, 2019, https://www.pna.gov.ph/articles/1059138).

VAT stands for Value Added Tax. VAT is a type of sales tax which is levied on consumption
on the sale of goods, services or properties, as well as importation, in the Philippines. To simplify, it
means that a certain tax rate (0% to 12%) is added up to the selling price of a goods or services
sold. It is also imposed on imported goods from abroad. The government may have seen VAT and
Expanded Value Added Tax as a good source of income for the government so it became a law. As
citizens of this country, we are obliged to accept this law and is hoping that the government are to
use this collections of taxes for the good of the country.