Question

PROBLEM 10-14. Budgeting Process [LO 3] Debra Green is the division manager of the Consumer Banking Division of Pennywise Bank. Each year Debra submits an annual budget to Barney Stringer, the bank’s chief financial officer. Debra’s bonus, salary increases, and promotion opportunities are based on how her performance compares with budgeted divisional income. Debra has to negotiate the budget with the CFO each year.

In the past, Barney has insisted that Debra underestimated revenue and overestimated expenses, whereas Debra tells Barney that he is expecting too much from her division.

During 2017, the Consumer Banking Division had a record year, and Debra received a huge bonus. For 2018, Barney insisted that Debra’s budget be at least equal to the prior year’s per- formance level. Debra stated that the prior year was exceptional and performance could not be repeated. After getting into a rather heated argument, they scheduled a meeting with the president and CEO of the bank to resolve their conflict.

REQUIRED

a. Explain why Barney and Debra have conflicting opinions.
b. If you were the president of Pennywise Bank, how would you resolve the argument between Barney and Debra?

Answer 1

Conflicting opinions between Barney and Debra

1. Debra’s 2017 budget was underestimated revenue and overestimated expenses.
2. The actual performance of Debra’s division was exceptional and record year and the same is not taken into consideration for 2018 year’s budget prepared by Debra.
3. Barney is of the opinion that 2017 year’s performance level is to be taken into consideration for 2018’s budget as well as the actual performance should reach the same level.
4. Debra’s opinion that last year’s performance was exceptional and could not be repeated so not required to be considered in 2018 budget.

1. Resolving the argument between Barney and Debra.

Before going into the argument resolution it as to be evaluated first, the reasons for the huge performance level in Debra’s division.

1. The opinion of Barney and Debra are to be considered to a certain level.
2. Every year the organisation has to grow and the performance level should be increased year by year.
3. On considering the consistency factors, the Debra’s division should try its maximum to achieve the last year’s performance in this year also.
4. But being it’s an exceptional based level factor, the same should also be considered and accordingly those factors may not be prevailing this year also and which will be a hindrance for that achievement.
5. Henceforth, in budget preparation a certain percentage of last year’s performance to be considered - including the opinion of Barney.
6. But the 100% of last year performance should not be included as it is of exceptional nature – including the opinion of Debra.