GB519: Measurement and Decision Making Unit 3 Scenario Complete Discussion Post

GB519: Measurement and Decision Making Unit 3 Scenario

Discussion Scenario Details

Scenario for the Unit 3 Discussion:

The Children’s Shoe Company has 100 franchised locations and six regional offices. Each region is managed

by a director who reports to the VP of Operations. In addition to the vice president of operations, executive

management includes the chief financial officer (CFO), the vice president of marketing, and the vice president

of human resources. All executive personnel work at the corporate headquarters in NY. Each director

maintains a regional office, complete with an administrative staff.

Shortly after taking over the company, the new management revised the budgeting process. The new budget

process is a top-down process. Because the new budget process affects a director’s compensation, directors

have a vested interest in budget development. To start the budget cycle, regional directors are given executive

goals for the subsequent year’s budget. Those goals include projected growth in new stores locations and

improved revenues, limited salary increases, and allocated corporate expenses. Directors prepare three

budgets — one for franchised locations, one for corporate locations, and one for administrative costs

associated with the regional offices. The regional budgets are consolidated into the corporate budget.

The director of region four follows a routine method for budget preparation. He delivered the corporate budget

goals to his regional accountant to prepare the first draft of the budget. After the director of region four

reviewed the first draft, he was not pleased. In the director’s opinion, budgeted net income was too high for the

region to achieve. The regional director asked the accountant to make adjustments.

Corporate goals included a general price level increase of 2-4 percent. The range was designed for flexibility to

allow higher cost-of-living areas such as Boston and New York to budget higher levels of cost increases than

lower cost-of-living areas. But even though region four is located in the lowest cost-of-living area for the

company, the director told the accountant to budget the maximum increase of 4 percent. The director was

confident that because the increase was within the stated goals, the corporate office would not notice.

Even though the director knew that it was not a reasonable goal, he also told the accountant that region four

would open eight (8) new stores during the coming year. Therefore, the budget should reflect accelerated startup

costs to consider the expansion. Based on historical precedent, the region could realistically expect to only

open four (4) or five (5) new locations.

The director of region four has a reputation for retaliating against employees who choose to ignore his

demands. Therefore, the accountant made the changes without hesitation. The result was a significant

reduction in region (4) four’s budgeted net income.

The accountant is a Certified Management Accountant (CMA) and is responsible for all of his family income.

Therefore, losing the job in region four would be devastating.

Checklist to complete this discussion:

 Why do you think that the director of region four would care about the level of budgeted net income?

 What do you think the new owner’s reaction would be if they learned of the director’s actions?

 Refer to the Institute of Management Accountants’ (IMA’s) Statement of Ethical Professional

Practice in Exhibit 1-8 of the textbook. What responsibilities does the accountant have in this situation? Is there

is a violation of the Statement? If so, how?

GB519: Measurement and Decision Making Unit 3 Scenario

Post to the Discussion per your Syllabus guidelines.

Disclaimer: This exercise may include actual companies and brand names solely for instructional purposes;

this exercise is not associated with any such actual company or brand name. All trademarks remain the

property of their respective owners.