TICE – Turkish Integrity Center of Excellence
Budgetary Slack
Topic: Budgeting/Standard Setting
Characters: Jennifer, a cost accountant working in a manufacturing division of a large corporation; Ron, the budgeting and standards supervisor and Jennifer’s superior in the accounting department
Jennifer has been working on next year’s budgets for some of the division’s products. After Ron looked over her work, he called her into his office.
Ron: “Jennifer, the budgets look pretty good, except that your estimates of materials costs seem too low.”
Jennifer: “I checked with production and engineering people, and they told me they expect materials costs to be down. They are trying some new procedures which are almost certain to reduce materials waste and damage significantly.”
Ron: “It’s too soon to know how much materials costs will drop, or even if they will be lower. I want you to redo the budget with materials costs about where they have been for this year. Then if materials costs are lower next year, the division will beat the budget and look good. There may be some good bonuses next year.”
Jennifer: “Using the current materials quantities puts slack into the budget for next year.”
Ron: “Most managers try to get some slack into budgets. There’s nothing wrong with that. Since the new procedures are still experimental, they haven’t been reported to corporate headquarters. This is a perfect opportunity to get an easy budget. I know that’s what the division controller expects and wants. Get the revisions to me as soon as you can.”
What Are the Relevant Facts?
- The division has developed new procedures, not yet fully proven, which may reduce materials costs for some products.
- Jennifer prepared product budgets based on the projected cost savings.
- The new procedures and anticipated savings have not been reported to company headquarters.
- Ron, Jennifer’s supervisor, wants her to prepare a less stringent budget which does not show the possible cost savings.
- If materials costs are lowered by the new procedures, the division would “look good” next year, and there would be bonuses for division personnel.
What Are the Ethical Issues?
- When should information, such as the new procedures and anticipated cost savings, be communicated upward in an organization?
- Is it ethical for managers of the division to use information which they have, and those in corporate headquarters do not, to their own advantage?
- Should the managers of a division propose a budget which they think will be easy to achieve? Will this proposed budget motivate managers and other employees?
- When managers prepare a budget, are they obligated to make the budget as accurate as possible?
- Should budgets be used both for planning and for evaluating the performance of company personnel?
Who Are the Primary Stakeholders?
- Jennifer
- Ron
- Other managers and employees within the division
- Corporate managers
- Stockholders have an indirect stake in this case. If the loose budget covers up for inefficiency within the division or if bonuses are paid out because the division beats its budgetary goals, stockholders’ interest are adversely affected.
What Are the Possible Alternatives?
- Jennifer could revise the budget, as Ron told her to do.
- Jennifer cold refuse to revise the budget.
- Jennifer cold go to Ron’s superior with her arguments that a realistic budget should be prepared.
What Are the Ethics of the Alternatives?
- From a “utilitarian” perspective (costs and benefits):
- Which approach to preparing the budget benefits the division and its managers?
- Which method of preparing the budget benefits the stockholders?
- For each of the alternative actions, what are the costs axes benefits for Jennifer?
- Which budget offers the greatest benefit overall?
- From a “rights” perspective:
- What rights do shareholders and corporate management have in this situation?
- What rights and responsibilities do division managers have?
- What responsibilities does Jennifer have?
Does she have responsibilities which conflict with each other?
- From a “justice” perspective (benefits and burdens):
- Is it fair and reasonable that division managers receive bonuses based on performance in comparison to a budget?
- How do the different alternative actions affect benefits and burdens for Jennifer?
What Are the Practical Constraints?
- The final budget may be different from what Jennifer and Ron propose. It may be revised and amended at higher levels of the organization.
What Actions Should Be Taken?
- What action should Jennifer take?
- Which of the ethical theories (utilitarian, rights, justice) should Jennifer use in eaching her decision?
Topic: Budgeting/Standard Setting
Characters: Jennifer, a cost accountant working in a manufacturing division of a large corporation; Ron, the budgeting and standards supervisor and Jennifer’s superior in the accounting department
Jennifer has been working on next year’s budgets for some of the division’s products. After Ron looked over her work, he called her into his office.
Ron: “Jennifer, the budgets look pretty good, except that your estimates of materials costs seem too low.”
Jennifer: “I checked with production and engineering people, and they told me they expect materials costs to be down. They are trying some new procedures which are almost certain to reduce materials waste and damage significantly.”
Ron: “It’s too soon to know how much materials costs will drop, or even if they will be lower. I want you to redo the budget with materials costs about where they have been for this year. Then if materials costs are lower next year, the division will beat the budget and look good. There may be some good bonuses next year.”
Jennifer: “Using the current materials quantities puts slack into the budget for next year.”
Ron: “Most managers try to get some slack into budgets. There’s nothing wrong with that. Since the new procedures are still experimental, they haven’t been reported to corporate headquarters. This is a perfect opportunity to get an easy budget. I know that’s what the division controller expects and wants. Get the revisions to me as soon as you can.”