Problem - Pretorious Manufacturing has just hired a new controller, Diana Metcalf. During her first week on the job, Diana was asked to establish a budget for operating expenses in 2016.
Since Diana was not yet familiar with the operations of Pretorious Manufacturing, she decided to budget these expenses using the same procedures as the prior controller. Therefore, in order to establish a budget for operating expenses, Diana started with actual operating expenses incurred in 2015 and added 4.3 percent. Diana based this percentage on inflation as measured by the consumer price index.
Comment on the effectiveness of Diana's budgeting strategy.