In: Accounting
CJ Corporation manufactures steel rebar for use in construction. The accounting staff is currently preparing next year’s budget. Bob Johnson is new to the firm and is interested in learn-ing how this process occurs. He has lunch with the sales manager and the production manager to discuss further the planning process. Over the course of lunch, Bob discovers that the sales manager adjusts sales projections between a flexible amount and a static amount based on which will reflect the lowest variance from actual results. The production manager does the same for cost estimates. Both managers’ year-end bonus is determined based on how low of a variance is achieved. When Bob asks about why they adjust their projections between flexible and static budgets, the response is simply that everyone around here does it. Required
a. What do the sales and production managers hope to accomplish by their methods?b. How might this backfire and work against them?c. Are the actions of the sales and production managers unethical
Analyzing the variance calculated from actual figures and static budget figures is one way of doing it. However, the most logical way is to compute the flexible budget based on actual production and then doing a 2 way analysis- One difference between static budget and flexible budget- Uncontrollable variance, Two- Difference between flexible budget and actual results- Controllable variance.
Such analysis gives the clear picture on how efficient they are and whether they are able to control costs.
The variance from static budget and actual might result in favorable variance, but this does not necessarily mean they have controlled costs. the lower costs may be achieved due to decrease in production, and not that they have controlled costs. In this way, such way analysis would back fire the sales and production managers and work against them. However, the managers would be more aware of such variance and would try hard to control such costs.
It is absolutely ethical to show the variance in the above mentioned format. Rather, this presentation shall be encouraged across all industries. This method gives an insight for the management to achieve cost efficiency.