Budgeting Case

Budgeting is one of the most painful and problematic processes for managers. Numerous financial, accounting, managerial, and ethical considerations are involved in this process. Managers have to consider all fixed and variable costs, anticipate changes in the economic conditions and taxation systems, suggest possible ways to reduce the costs, and make sure that the final budget works for the benefit of all stakeholders. Unfortunately, ethical issues and conflicts constantly crop up in managerial budgeting (Keown, 2003). Consequently, managers face the risks of losing their positive reputation and business confidence. Ethical conflicts faced by managers during budgeting can negatively impact shareholder wealth (Keown, 2003). In the case of a waste treatment facility, such ethical conflicts may easily lead to problems with stakeholders and the entire community. In these facilities, sound budgeting is actually a matter of health, wellbeing, sustainability, and environmental protection in the local community. Given the importance of these values, it is absolutely ethical for the manager to submit a budget for an amount higher than the cost.

As manager of the waste treatment facility in Columbus, Illinois, Ann Paxton is facing a difficult situation. Her main task is to plan the budget for the coming year, while considering possible changes in the economic conditions, the taxation system, and the amount of waste treatment services to be provided to the community. Inherent in the process of any capital budgeting is the problem of balancing revenues with costs. The manager anticipates that the amount of waste to be treated in the coming year will be higher than planned. Taxes continue to grow. Most probably, the city controller will reduce the proposed budget by another 10 percent. The ethical issue to be resolved is whether the manager has the ethical right to submit a budget for an amount higher than the cost.

Basically, the problem the manager is facing is that of budget variances (Jiambalvo, 2009). Budget variances are considerable deviations from the planned budget (Jiambalvo, 2009). Budget variances may have three different causes: (1) the budget might have not been conceived; (2) conditions of budgeting might have changed; or (3) managers might not have been good coping with their primary obligations (Jiambalvo, 2009). None of these causes is relevant in the discussed case. On the contrary, bearing in mind the role which the municipal waste treatment facility plays in maintaining the due level of environmental protection and the contribution it makes to the community's sustainable development, there is no way to cope with its financial obligations and ensure continuous operation other than submitting the budget for an amount higher than the cost.

Submitting a budget higher than the cost is ethical, since it will work in the stakeholders' interests. The discussed variation in cost is an "unfavorable budget variance",