A11-68 Ethics and Budgetary slack

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A11-68 Ethics and Budgetary slack. Mendelson Company, a publicly held corporation, operates a regional chain of large ­drugstores. Each drugstore is operated by a general manager and a controller. The general manager is responsible for the day- to- day operations of the store, while the controller is ­responsible for the budget and other financial tasks. The general manager, Sophie Beckett, has been at Mendelson Company for several years. Employee turnover is high at Mendelson Company, just as it is in the retail industry in general. Beckett just hired a new controller, Mike Dexter.

Dexter was asked to prepare the master budget. Each retail location prepares its master budget once a year and then submits that budget to company headquarters for approval. Once approved by headquarters, the master budget is used to evaluate the store’s perfor-mance. These performance evaluations directly affect the managers’ bonuses and whether ­additional company funds are invested in that location.
When Dexter was almost done preparing the budget, Beckett instructed him to increase the amounts budgeted for labor and supplies by 20%. When asked why, Beckett responded that this budgetary cushion gives store management flexibility in running the store. For exam-ple, because company headquarters tightly controls operating funds and capital improvement funds, any extra money budgeted for labor and supplies can be used to replace store furnish-ings or to pay bonuses to help to retain good employees. She explains that the chance of getting extra funds from company headquarters is not good; this “cushion” is usually the only opportunity to replace store décor or to pay bonuses to key employees. Beckett also needs extra funds occasionally to make “under the table” payments to employees as incentives to work extra hours or to keep them from leaving for a higher- paying job.

A11-68 Ethics and Budgetary slack

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Dexter feels conflicted. He is eager to please Beckett and he is wondering what he should do in this situation.

Requirements
1. Using the IMA Statement of Ethical Professional Practice as an ethical framework, answer the following questions:
a. What are the ethical issue(s) in this situation? b. What are Dexter’s responsibilities as a management accountant?
2. Would your answer differ if Mendelson Company were instead owned by one individual instead of being publicly held? Why or why not?
3. Would anyone be harmed if slack were to be built into the budget? Why or why not?
4. Discuss the specific steps Dexter should take in this situation. Refer to the IMA Statement of Ethical Professional Practice in your response.

A11-68 Ethics and Budgetary slack

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