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10-1 Ethics Case: Columbus Park- Waste Treatment
Case Study 7.3
Fatmata K. Mansaray
Department of Management, Florida Institute of Technology
BUS 5431 Managerial Accounting
Dr. Arthur Gilbert Jr.
Sunday 18th October 2020
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Executive Summary
Ann Paxton is the manager of the waste treatment facility for the city of Columbus Park, Illinois. Ann is
preparing an annual expense budget for the coming year. The city’s tax revenues are down, and the
controller will probably reduce any budget submitted by 10%. For this reason, Ann is considering
submitting a budget of 4,900,000 instead of the expected expense budget of 4,200,000 (Variable costs are
.20 x 9,000,000 gallons =$1,800,000 + $2,400,000 of fixed costs) in order to get enough funding after the
eventual 10% reduction. Ann Paxton also has also considered the increase in costs in case of a new labor
contract that might increase the costs by more than 300,000 and the quantity of waste possibly being
500,000 Gallons higher. Paxton must stay within the budget to have any chance for a promotion during
the fiscal year.
Overview
As Ann Paxton is preparing the annual budget for the waste treatment facility for the next fiscal year, she
is concerned about her promotion which is tied to her performance in the budget management. This leads
her to consider submitting a budget that is beyond the needs of the organization by $ 700,000. She is
aware that the city’s tax revenues have gone down and that the budgets presented may be reduced by 10%
therefore she is presenting 4.9million instead of $4.2 million to compensate for any deduction made by
the controller. Ann Paxton argues that the expected waste may increase by over 500,000 gallons and that
there might be a need for a labor contract which will increase the costs by $ 300,000.
Issues Addressed
1. Proposed versus realistic budget
2. Is it ethical for Ann to submit a budget for an amount higher than the cost expected to be
incurred?
Proposed solution
Proposed versus realistic budget: Before a budget is submitted there must be a base, usually some data
relating to the past, which is adjusted up or down based on what is planned for the period under
consideration. These adjustments must be justifiable before the budget review committee. However, Ann
Paxton is considering submission of a budget of 4,900,000, which is $700,000 more than the expected
expenses without detailed calculations and justification for the excess.
Based on the information given, the estimated expenses for the period should be:
Variable costs ($0.20 x 9,000,000)
$1,800,000
Fixed Costs
$2,400,000
Total Budget
$4,200,000
If Ann Paxton has enough reason to estimate that the waste will increase by 500,000 gallons and that a
new labor contract may arise and increase costs by $300,000, It is better to budget them and provide clear
information on why she thinks both items are important. In that case, the budget should be 4,600,000 as
calculated below:
Variable cost ($.20 x 9,500,000)
$1,900,000
Fixed Costs
$2,400,000
Additional Costs related to labor contract
$300,000
Total Budget
$4,600,000
Is it ethical for Ann to submit a budget for an amount higher than the cost expected to be incurred?
Presenting a budget of 4,900,000 while only 4,200,000 is needed without any justification for the excess
700,000 is unethical. From the information provided, Ann is worried that there might be a 10% cut on her
budget so she will rather increase the budget without a good reason in order to end of with a higher
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budget after the 10% cut. This is intended to make her look efficient by spending less than what was
budgeted and help her get her the promotion that she wants. This is one of the disadvantages of using a
budget as an evaluation tool.
If the city cuts the budget due to its revenues dropping, everyone should make the necessary adjustment
to accommodate the deficit. Trying to get more than needed will reduce the other departments’ budget
when you might not be able to spend it all.
Ann mentioned that the waste might increase by 500,000 and that there may be a new labor contract that
could increase the costs by $300,000. However, after considering these items the budget should come up
to 4,600,000 which is $300,000 less than the 4.9m budget that Ann is proposing.
Submitting a budget of $4.9M with $700K more than what is needed is a poor management decision
based solely on her personal interest (promotion). It will raise questions about her credibility and may
increase the chances of the budget being reduced by the budget review committee due to lack of
convincing justification supporting the additional costs. It will make more sense to present the expense
budget of $4,600,000 which takes into account the expected additional costs related to waste and labor
contracts.
Conclusion
While every employee’s dream is to get bonuses and promotions, managers have the responsibility to
protect the company’s interest above everything else including their personal ones. Proposing a budget
above the needs in view of creating a budgetary slack to get a promotion is a conflict of interest and is
unethical. As a manager, if Ann is certain that there is potential that the waste will increase and that a
potential labor contract may occur during the year, it Is justifiable to include these items in the expense
budget bringing the total budget to $4,600,000. Any amount above this is questionable. Ann Paxton
should be reminded that her decisions should be based on the company and its owner’s interest before her
personal interest.
Reference:
Jiambalvo, J, Managerial Accounting (6th Edition)