Columbus Park - Waste Treatment Facility

Ann Paxton is the manager of the waste treatment facility for the city of Columbus Park, Illinois. Ann is in the process of preparing the Annual expense budget. She is thinking that her costs for the next year will be around $3,200,000 but she is thinking about budgeting for $3,900,000. She is sure that the city controller will reduce her budget by 10%, and new contracts could increase costs or waste could be more gallons than budgeted. She wants to make sure that her costs are not more than she budgeted because she wants to make sure she will still have a chance at a promotion.

An Annual expense budget is a budget that will estimate the costs of the waste treatment center for the coming year. As with any budget this is a formal document that represents the company's plans for achieving the goals. With any budget there are budget variances expected. A budget variance is the difference between the budgeted amount and the actual costs occurred.

This is a practice that happens often in companies where costs are budgeted higher to cover unexpected costs. This isn't illegal and can be done. Is this practice ethical. This depends on how much higher the costs are increased. In cases of budgets the figures are estimates of what is expected and you should allow for unexpected costs like increase in contract prices or more customers than expected. In this case it would be more waste gallons produced than what is estimated.

What Ann is considering is unethical she is looking to increase her budget by 700,000 more than what she estimates is needed. Even if the controller would reduce her budget by 10% and say costs were increased due to contracts of $200,000 and suppose there was 500,000 more gallons of waste per the example, these costs would increase the budget by 620,000. However the chance of all this happening is unlikely and if she feels that this would be the case she would need to include these items into her expense budget. I feel increasing the budget costs to make sure she doesn't go over the budget so that she can make sure not to look bad is an example of Budget Padding. What she would be doing would be creating a budget slack making her budget very easily achieved.

In conclusion I feel that Ann should reevaluate her budget making sure that she is going over the expenses and projections and allowing for any extra costs but not padding the budget just to make herself look better. Budgets need to be as close to the actual costs for the year so that companies are able to plan and control their operations better for the current year and for the future.