Question

The director of marketing for Starr Computer Co., Megan Hewitt, had the following discussion with the company controller, Cam Morley, on July 26 of this year:

Megan: Cam, It looks like I am going to spend much less than indicated on my July budget.

Cam: I'm glad to hear it.

Megan: Well, I'm not so sure it's good news. I'm concerned that the president will see that I'm under budget and reduce my budget in the future. The only reason that I look good is that we've delayed an advertising campaign. Once the campaign hits in September, I'm sure my actual expenditures will go up. You see, we are also having our sales convention in September. Having the advertising campaign and the convention at the same time is going to kill my September numbers.

Cam: I don't think that's anything to worry about. We all expect some variation in actual spending month to month. What's really important is staying within the budgeted targets for the year. Does that look as if it's going to be a problem?

Megan: I don't think so, but just the same, I'd like to be on the safe side.

Cam: What do you mean?

Megan: Well, this is what I'd like to do. I want to pay the convention-related costs in advance this month. I'll pay the hotel for room and convention space and purchase the airline tickets in advance. In this way, I can charge all these expenditures to July's budget. This would cause my actual expenses to come close to budget for July. Moreover, when the big advertising campaign hits in September, I won't have to worry about expenditures for the convention on my September budget as well. The convention costs will already be paid. Thus, my September expenses should be pretty close to budget.

Cam: I can't tell you when to make your convention purchases, but I'm not too sure that September items should be expensed in July's budget.

Megan: What's the problem? It looks like "no harm, no foul" to me, I can't see that there's anything wrong with this -- it's just smart management.

Instructions

How should Cam Morley respond to Megan Hewitt's request to expense the advanced payments for convention-related costs against July's budget?

Note: add citations when necessary.

Answer 1

Cam should reject Megan's request to charge the convention-related costs against July's budget. This is just one example of many attempts to slide expenses into different budget periods than when actually incurred. This is a common issue that controllers face. Often, operating managers will attempt to accelerate future expenditures into low-expenditure months or delay present expenditures into future periods in order to avoid going over budget. These attempts to “slide” expenditures should not be supported, or else the whole concept of the budget will begin to become an accounting game. The integrity of the budget process must be defended by the controller. Thus, expenditures should be accrued to the period in which the benefit is received. Cam should reassure Megan that management will not take a single month's results as an indication of either good or poor management. Month-to-month variation should be expected. Rather, management will take a long-term perspective and evaluate whether the department is staying within budget over a longer period of time. Abnormal month-to-month variations from budget can “wash out” over time.