Question

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.”

Do you agree with Ron statement and auguments? Make your own recommendations

Answer 1

yes i agree witn ron statement. because it may affect the company as whole .

Ethical issues involved are as follows:-

• the material cost will drop next year and still it is kept the same as of the current year, it may understatement of the budgeted cost
• This will impact the competitiveness and efficiency of employees in the long run as they will have easy targets and there is a chance of less to achieve
• The slacks in the budgets are put to increase the self bonus but it is very harmful for the company as a whole in thefuture .
• The budget is prepared considering the overall organizational objectives and not to keep any one person happy, but here we can clearly see that the budget is prepared to keep the "Divisional manager" happy

Below are the possible alternative for Jennifer"-

• She could have cross-checked with Divisional manager directly
• She could have set up a meeting with the Production , Engineering, and Ron for better clarity and more certainty on reduction in the material cost
• She could have taken the clarification from Corporate team on this type of situation and whether any cut in the cost should be incorporated or not

Jennifer should use the " Utilitarian Approach" as in this approach the budget is prepared to keep in mind the stockholders of the company who are the ultimate owners. The budget is not prepared for the benefit of any one individual or division, it is for the company as a whole. and in this approach, the overall benefit of the company is taken into account