Budgeting and Responsibility Center Accounting
The US division of Swiss Chocolate has a
budget directive to achieve a specific level of operating income for
the period. If the specific level of operating income is achieved, the
plant manager, Rick White, will receive a bonus.
White communicated the requirements to
management and requested that the managers estimate their departmental
costs and submit to Smith for compilation of the operating budget for
the period.
When the projected budget costs were
compiled, Smith noted that management’s estimates of costs were less
than anticipated, which resulted in a higher anticipated level of
operating income than the target established by the Swiss home office.
White was informed of this, and made a suggestion to increase costs
within the budget in order to provide a “buffer” in case an unexpected
event occurred resulting in greater spending. Smith was greatly
concerned with White’s request. Rick indicated that this was just his
suggested approach to “risk management.”
- What type of practice is Rick suggesting?
- What are the ethical implications for Steve in this situation?
- What would you suggest Steve do to solve this dilemma?
