Dis:#5 Cost Accting

The US division of Swiss Chocolate has a budget directive to achieve a specific level of operating income for the period. If the specific level of operating income is achieved, the plant manager, Rick White, will receive a bonus.

White communicated the requirements to management and requested that the managers estimate their departmental costs and submit to Smith for compilation of the operating budget for the period.

When the projected budget costs were compiled, Smith noted that management’s estimates of costs were less than anticipated, which resulted in a higher anticipated level of operating income than the target established by the Swiss home office. White was informed of this, and made a suggestion to increase costs within the budget in order to provide a “buffer” in case an unexpected event occurred resulting in greater spending. Smith was greatly concerned with White’s request. Rick indicated that this was just his suggested approach to “risk management.”

• What type of practice is Rick suggesting?
• What are the ethical implications for Steve in this situation?
• What would you suggest Steve do to solve this dilemma?