The Accounting Education Change Commission (1992) advocates teaching and learning techniques, "such as cases, simulations, and group projects." In addition, Wright (1994) finds that while students perceive that significant amounts of accounting research is performed, little of this research is incorporated into their accounting courses. This paper presents a simple budgeting simulation derived from several important aspects of research in budgeting by Fisher et al. (2000). Use of the simulation allows instructors to introduce basic budgeting concepts while giving students insight into key results of recent budgeting research. The exercise can be completed easily in one fifty-minute class period. The following budgeting concepts are introduced and explored:

· Performance-based (bonus) compensation systems
· Budget negotiation (participative budgeting) and slack
· Budgetary satisfaction and commitment (effort)

The simulation is presented as an appendix and should be read in conjunction with the following sections that discuss the simulation's relation to current research and teaching strategies.

The Simulation and the Fisher et al. Study
Fisher et al. (2000), citing prior budgeting literature, maintain that budget processes involving negotiation between a subordinate and superior manager are common in practice (pg. 94). They empirically evaluate the effects of negotiated budgets on a variety of budget outcomes such as budget level, slack, and performance. Significantly, their study finds that following a failed budget negotiation; an imposed budget by the superior manager has a de-motivating effect on the subordinate manager's effort to achieve the budget target.

The simulation presented here allows students to play the role of a kitchen manager (subordinate) of a fine-dining restaurant who is negotiating the annual food cost budget with the restaurant's general manager (superior). The kitchen manager makes an initial suggestion for the food cost budget, which the general manager either accepts (a successful negotiation) or rejects, in which case the general manager imposes a budget target (a failed negotiation). The simulation involves only one "round" of negotiation, which is less realistic than actual practice (the Fisher study includes up to four rounds of negotiation). Nevertheless, the exercise is sufficiently realistic to introduce negotiation as a form of budgetary participation within the time limits of a single class period.

Suggested Teaching Approach
The simulation has been classroom tested in conjunction with the Middletown American Cafe case published by the AICPA (1995). However, use of a case is not necessary; the simulation can easily be adapted to an example company from a textbook. In classroom use, the simulation works well after students have been exposed to participative budgeting and slack through textbook reading or lecture. Each student receives a copy of the simulation to prepare individually. Students should be allowed time to read the case, after which the instructor can emphasize the implications of the students' suggested target by writing the following statement on the board: SLACK PERCEIVED BY THE GENERAL MANAGER = KITCHEN MANAGER'S SUGGESTED TARGET LESS $400,000. An example can be given in which the student/kitchen manager submits a budget of $410,000, implying no actual slack but perceived slack on the part of the General manager of $10,000 ($410,000 - $400,000). After this explanation, experience has shown that approximately five minutes is sufficient to allow students to formulate and record their thoughts. Next, three discussion questions are presented that have proven effective at encouraging student discussion.

· Question 1: Ask students about their suggested budget targets.
The instructor should write the possible budget targets on the board and poll the class, taking a tally of how many choose each target. Students readily identify with the kitchen manager’s dilemma; if s/he picks a high target to improve the chances of coming in under budget, there is an increased probability of receiving an imposed low target, and picking a low target reduces the chances of receiving an imposed budget, but leaves little room for unexpected increases in food costs. Thus, most students suggest a target of $420,000 or $430,000, reasoning that this represents a fair compromise between what the kitchen manager wants and what the general manager prefers. A few students suggest higher or lower targets. Asking these students why they chose the target they did is a good way to stimulate discussion. Students choosing a low target (i.e., $410,000) typically focus on the need to be truthful about their actual beliefs, and the need to maintain the good relationship that exists with the general manager. Comments from students selecting a high target (e.g., $440,000 or $450,000), include the following:

    "If the employment market is favorable for kitchen managers, the general manager will be hesitant to reject my suggestion since I can easily get   another job."

    "I know more than the general manager about the food market, so I can suggest more slack without his/her knowing my true beliefs."

The first comment identifies the external job market for kitchen managers as a factor affecting the negotiating power of the parties. The second comment reflects the kitchen manager's superior knowledge of the area being budgeted.

· Question 2: Ask students how they feel about an imposed budget of $400,000.
To continue the discussion, the instructor should take the role of general manager and announce that s/he has made following decision in regard to setting of the food budget: all suggested budget targets above $405,000 will be rejected and replaced by a $400,000 budget. Inevitably, this leads to all students receiving an imposed budget after a failed negotiation. Now ask students to consider how they feel about being in such a situation. This question produces a range of responses. Typical responses reflect feelings of disappointment, frustration, or unfairness that the general manager has imposed a target on the low end of the range. The following response has been offered by some students (as an alternative, the instructor can bring this issue out with some leading questioning):

    "The general manager never really intended to consider my (our) suggestion(s)."

This response reflects the view that the negotiation was really a form of pseudo-participation (see Lindquist, 1995). The "negotiation" was an attempt on the part of senior management to make the operating manager feel involved when in fact there was really no intention to consider his or her input. Students seem especially responsive to this idea once it is suggested, and they will offer examples of other forms of pseudo-participation outside the context of budget negotiations. This issue is important because the feelings of unfairness have implications for budget effort, the subject of the next question.

· Question 3. Ask students how hard they would work toward achieving the imposed $400,000 goal.
Inevitably this question raises the issue of how achievable the $400,000 goal is. Student responses have included the following:

    "I would work toward the goal but not too hard. Otherwise, in the future, the general manager may think I can always achieve an imposed goal."

    "I would make a reasonable effort, but as the year progresses, if it becomes apparent I will not achieve the goal, I will not put forth much effort."

The second response, even if not brought up by a student directly, can be introduced by the instructor because it illustrates the general manager's dilemma: accepting a target with too much slack will allow the kitchen manager to earn a bonus without controlling costs while setting a budget target that is seen as unachievable will de-motivate the kitchen manager and likely lead to a lack of cost control. In either case, net income is threatened, which may lead to a negative evaluation of the general manager's performance.

Presenting the Findings of Research
Wright's (1994) study indicates students are interested in having accounting research included in their accounting courses. After covering the above discussion questions, the instructor is in a position to offer students a significant finding of Fisher et al. (2000). The finding is that subordinate mangers' performance (i.e. effort) in achieving a budget is significantly lower for an imposed budget following a failed negotiation than if the same budget were imposed unilaterally by the superior manager without negotiation (pp. 109-110). Fisher et al. speculate that the reason for this finding is that the subordinate manager sees the negotiating process as unfair and becomes de-motivated as a result. Thus, the finding has a prescriptive implication for superior managers: it is better to unilaterally impose a budget than to have the same budget result from a failed negotiation process.

Concluding the Discussion
Although the prescriptive lesson cited above may seem like the point of the exercise to students, the primary teaching objective is to give students an introduction to basic budgeting concepts. A good procedure to conclude the session is to review with students how the simulation illustrates the following basic budgeting concepts:

· Responsibility accounting and performance-based compensation - the kitchen manager is personally responsible for the annual food cost and has a portion of his/her compensation based on meeting the budget for this item.

· Budgetary participation - the kitchen manager has a degree of influence (via the negotiation process) in setting the target to which s/he will be held.

· Imposed budget - this is the opposite of a negotiation, in which the general manager unilaterally decides what the food cost target is, without input or negotiation from the kitchen manager.

· Budgetary slack - this is the difference between what the kitchen manager actually believes food cost can be held to and the final budget target. This amount can be positive (final budget greater than $410,000), or negative (final budget less than $410,000).


Accounting Education Change Commission. 1992. The First Course in Accounting: Position Statement No. Two. Issues in Accounting Education (Fall): 249-251.

Buehlmann, D., and L. Sommer. 1995. Middletown American Cafe (MAC): The Planning and Control Process. AICPA Professor/Practitioner Cases (case no. 94-12).

Fisher, J.G., J.R. Frederickson, and S.A. Peffer. 2000. Budgeting: An Experimental Investigation of the Effects of Negotiation. The Accounting Review (January): 93-114.

Lindquist, T. 1995. Fairness as an Antecedent to Participative Budgeting: Examining the Effects of Distributive Justice and Referent Cognitions on Satisfaction and Performance. Journal of Management Accounting Research (Fall): 122-147.

Wright, A. 1994. Research in Accounting: Student Perspectives. Journal of Accounting Education (volume 12, no. 2): 161-174.




You are the kitchen manager of the Middletown American Cafe. Your annual salary of $40,000 is supplemented by a $10,000 bonus which is earned if the annual budget for food cost is achieved. Your suggested cost target is very important because once the budget is set, it is strictly adhered to; if actual food cost exceeds budget, even by a small amount, you do not receive a bonus.

You must soon forward to the general manager your suggested budget target for next year's food cost.

You and the general manager agree that next year's food sales will be $1,000,000. In the past, food costs have ranged from 40% to 45% of food sales depending on market prices for food items.

Your personal feel for the market leads you to believe that you can achieve a food budget of $410,000 (41% of sales) for the upcoming year. You prefer a budget of $450,000 to allow for any unexpected price increases, however you also know the general manager frowns on "cushioned" budgets and tends to see a budget of greater than $400,000 (40% of sales) as having a degree of "cushion" or "slack."

You and the general manager have a good working relationship and share mutual respect. Once you submit your suggested target, the general manager will be hesitant to change it unless s/he feels it contains an unacceptable degree of slack, in which case s/he will impose a budget of $400,000.

Please select your suggested budget target for next year's food cost from the following list:

	Your	Slack
	Suggested	Perceived by
	Target	General Manager
	$450,000	$50,000
	$440,000	$40,000
	$430,000	$30,000
	$420,000	$20,000
	$410,000	$10,000
	$405,000	$5,000
	$400,000	$0

Write your suggested target here: $_________________ .

Briefly describe why you chose the budget target for food cost that you did: