Question

The textbook mentioned that it is unethical if a manager makes the, for example, Sales Budget, lower than it supposes to be on purpose so that he/she can get more bonus by the end of the year. Realistically, however, it is common in most companies because it is impossible to make the actual sales amount equals to the budget, and it is reasonable that everyone wants a higher income. Imagine that we are preparing a budget for a business event, $5000-$6000 is an acceptable range for the CEO and CFO. How much budget you’ll make? I’ll make it as close to $6000 as possible. Am I violating business ethics?

Answer 1

Answer :

An inherent conflict often exists between the planning and control phases of budgeting. During the planning phase, organizations are most concerned about getting accurate estimates that lead to positive results. The control phase requires evaluating performance of managers by comparing actual results to the operating budget. Managers often must decide between doing what is best for them and what is best for the organization as a whole.

Establishing a sales budget that is considerably lower than what will likely happen causes problems for the entire organization. Production may be short of materials and labor, causing inefficiencies in the production process. Selling and administrative support may be lacking due to underestimating sales. Customers will not be satisfied if they must wait for the product. The dilemma you face as a manager in this situation is whether to do what is best for you (set a low sales budget estimate to earn the bonus) or do what is best for the company (estimate accurately so the budget reflects true sales and production needs).

In the given problem while making budget the CEO and CFO must consider other factors like last year sales, market demand of the product, production capacity of the company etc. If the acceptable range is $5000 - $6000, then it does't mean that the budget should be between these range only, the budget should be considering other factors and it could be morethan $6000.