Read the case study at the end of Chapter 1, “Approaches to Forecasting” and answer the following questions. Respond substantively to at least two of your classmates’ postings.
Case study #1
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1. Approaches to Forecasting
Fish King Restaurants, a well-known restaurant chain in the Midwest, is in the initial stages of preparing its annual forecast for 2007. Kevin Vieden has recently joined Fish King’s accounting staff and wants to learn as much as possible about the company’s forecasting processes. During a recent lunch with Scott Bruce, restaurant manager, and Brenda Clement, sales manager, Kevin initiated the following conversation:
Kevin: Since I’m new around here and am going to be involved with the preparation of the annual revenue forecast, I’d be interested to learn how the two of you estimate sales and production numbers.
Brenda: We start out very methodically by looking at recent history and 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.
Scott: 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 closing inventories will be, which is sometimes difficult.
Kevin: Why does that present a problem? There must have been an estimate of closing inventories in the forecast for the current year.
Scott: Those numbers aren’t always reliable, since Brenda makes some adjustments to the sales numbers before passing them on to me.
Kevin: What kinds of adjustments?
Brenda: 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 2 to 5 percent.
Scott: So you can see why this year’s forecast 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 percent to the estimates; I think everyone around here does the same thing.
Kevin, Brenda, and Scott have described the use of what is sometimes called forecasting slack.
- Explain why Brenda and Scott behave in this manner, and describe the benefits they expect to realize from the use of forecasting slack.
- Explain how the use of forecasting slack can adversely affect Brenda and Scott.
- As a management accountant, Kevin Vieden believes that the behavior described by Brenda and Scott may be unethical. Explain why the use of forecasting slack may be unethical.