Question

Recently, New York State's Governor, Andrew Cuomo has requested the NY Legislature to consider "flexible" budget for the coming fiscal year (Links to an external site.). Although the "flexible" budget referred by Gov. Cuomo simply means allowing more revenue/spending flexibility of the state government (different from the "flexible budgets" discussed in Chapter 9), the underlying logic behind Gov. Cuomo's request is actually manifested by the "flexible budgets".

As we learned from Chapter 8 Master Budget, planning budgets are prepared based on the expected or forecasted customer demands and sales activities of a firm's products or services. Assuming a certain level of sales activities, other resource procurement and actual production activities are planned accordingly. However, the recent outbreak of Coronavirus COVID-19 levies an onerous burden to a firm's budget preparation.

Please read the attached WSJ. commentary and post your answers to the following questions on the forum.

1. How "uncertainty" is different from "risk"?

2. Please assume you are currently preparing an annual budget for Intuit, Inc., a producer of tax compliance software company. Does COVID-19 make you prepare multiple "flexible budgets"? Why or why not?

3. Please assume you are currently preparing an annual budget for Starbucks Corporation. Does COVID-19 make you prepare multiple "flexible budgets"? Why or why not?

4. Why do you think Gov. Cuomo is requesting a "flexible" budget?

Answer 1

1) The risk is the incurring a defined loss on the happening of the event or situation. Whereas, the uncertainty denotes the different situation of activities and there exists an uncertainty of happening of a certain position.

2) The current situation of COVID-19 impact has raised an uncertainty situation to judge the production and sales position. Thus, the annual budget for Intuit, Inc., the tax software producer, calls for flexible budgeting under the COVID-19 situation because it is not certain that which production and sales level is achieved in the coming year.

3) In the COVID-19 situation, it is not certain that the Starbucks Corporation would prevail at what production and sales level in the coming year. Therefore, it calls for the preparation of the multiple flexible budgeting under different level of production and sales.

4) The Gov. Cuomo is requesting for flexible budgeting because it is not certain to forecast the customer demands and sales activities of the firm’s products or services. The over-budgeting will result in more spending by the state government.