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 the current year: Megan: Cam, it looks like I'm 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. How should Cam Morley respond to Megan Hewitt's request to expense the advanced payments for convention-related costs against July's budget?

Answer 1

Budgeting is used by the managers to determine the future course of actions of the organization. I helps the organizations to estimate its future action. It is useful in satisfying the future course of actions.

The request made by Mr. Megan Hewitt's should be rejected by Mr. Cam Morley. Mr. Megan had requested to Mr. Cam to include the convention related costs in July's budget, which is very common issue that is faced by the managers. Usually the managers try to balance out the heavy future expenditure in the low expenditure months. This is ethically incorrect. Budget should be prepared in a way that it projects the actions to be taken correctly.