Kevin Jackson is the manager of the Repairs and Maintenance Department of J &B;

Question

Kevin Jackson is the manager of the Repairs and Maintenance Department of J &B; Industries. He is responsible for preparing his department's annual budget. Most managers in the company inflate their budget numbers by atleast 10 percent because their bonuses depend upon how much below budget their departments operate by year end. Jackson turned in the following information for his department's budget for NEXT year to the company's budget committee to be reviewed and approved Actual This Year $20,000 16,000 24,000 Budget This Year Budget Next Year Supplies Labor Utilities Tools Hand-carried equipment Cleaning materials Miscellaneous Totals 80,000 8,500 12,500 25,000 4,600 2,000 82,000 8,000 9,000 16,400 4,200 2,100 96,000 10,200 15,000 30,000 5,520 2,400 $152,600 $137,700 $183,120 the current year's budget. They questioned him about this and he responded by saying that he expects a significant increase in activity in his department next year, so he will need more money to operate effectively. Pretend that you are a member of the budget committee. What do you think about his justification of the 20% increase? Tell me if you agree or disagree and support you answer. Do you think that there is anything "unethical" going on?

Explanation / Answer

I do not agree 20% flat increase in the next year budget on current year. Reason being:

a) Current year actual itself is 90% of the current year (137700 / 152600 = 90%)

b) If at all we expect a significant increase in activity next year, then we need to take an estimate on the current year actual. If we take 20% hike on actuals then also the total budget for next year should be 165240 (137700 x 120%). But the projected next year budget is 183120 which is way high than current year actuals.

c) Labour being the biggest single item, the budget amount for next year is only 17% higher than than the current year actuals compared to an average 50% hike for all other major items (supplies, Tools, hand carried equipment). So there is a mismatch in the allocaton for the next year budget compared to the current year actuals.

I think the 20% hike in the next year budget is aiming at getting the higher bonus.

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