DQ 1The Master Budget and Responsibility Accounting

DQ 1The Master Budget and Responsibility Accounting

From Chapter 22, Ethical Issue 22-1. Complete all parts of the case and respond to atEthical Issue 22-1

Residence Suites operates a regional hotel chain. Each hotel is operated by a manager and an assistant manager/controller. Many of the staff who run the front desk, clean the rooms, and prepare the breakfast buffet work part-time or have a second job so turnover is high.

Assistant manager/controller Terry Dunn asked the new bookkeeper to help prepare the hotel's master budget. The master budget is prepared once a year and is submitted to company headquarters for approval. Once approved, the master budget is used to evaluate the hotel's performance. These performance evaluations affect hotel managers’ bonuses and they also affect company decisions on which hotels deserve extra funds for capital improvements.

When the budget was almost complete, Dunn asked the bookkeeper to increase amounts budgeted for labor and supplies by 15%. When asked why, Dunn responded that hotel manager Clay Murry told her to do this when she began working at the hotel. Murry explained that this budgetary cushion gave him flexibility in running the hotel. For example, because company headquarters tightly controls capital improvement funds, Murry can use the extra money budgeted for labor and supplies to replace broken televisions or pay “bonuses” to keep valued employees. Dunn initially accepted this explanation because she had observed similar behavior at the hotel where she worked previously.

Requirements

Put yourself in Dunn's position. In deciding how to deal with the situation, answer the following questions:

1.What is the ethical issue?

2.What are my options?

3.What are the possible consequences?

4.What should I do?

DQ 2Flexible Budgets and Standard Costs

What are the benefits of standard costs?

How do businesses set those standards?