Reference no: EM132955670

Cantik Berhad manufactures and sells pottery products to departmental stores. The Management Accountant is preparing the annual budget and has asked the sales group to prepare the sales estimates. All members of the sales force have been asked to estimate sales in their territory for their products.

It is found that the Sales Director uses the sales estimates to develop the target levels at which commissions begin. Specifically, the Sales Manager takes the sales estimate, add 15%, and the result becomes the sales hurdle level. If sales are less than the hurdle level, no commission is paid. If sales are above the hurdle level, commissions are paid at varying rates.

Required:

Problem a. Define the term of budgetary slack and briefly describe how it can cause problems to Cantik Berhad. Explain how the budgetary slack can adversely affect the company's performance.

Problem b. What will be the behaviour of the sales force if they know the relationship between their estimates and the target level of sales?

Problem c. What is the likely consequence of basing the company's budgets on these estimates?

Problem d. If you were the Management Accountant in this company and were responsible for both reward system and budgeting system, what would you do?

Problem e. Explain how an organization would reduce the problems caused by the budgetary slack. Briefly discuss how Cantik Berhad can reduce the amount of slack into its budget.