A new CEO takes control of Do-Da Industries to turn it around (to make it profitable). Based on market research she wants to focus on two specific product lines. By the end of the first year the company exceeded budgeted profits by 18%. The company’s controller knows his annual bonus depends on exceeding budgeted profit and that next year’s performance would unlikely be similar to this year’s. Profit must exceed budget by 10% before the controller’s bonus kicks in. The controller realizes he can accrue some of next year’s expenses and defer some of this year’s revenue while still exceeding this year’s budgeted profit by 10%. Required: Why would the controller want to defer revenues but accrue expenses? Is this ethical? Why
Master Budget
A master budget can be defined as an estimation of the revenue earned or expenses incurred over a specified period of time in the future and it is generally prepared on a periodic basis which can be either monthly, quarterly, half-yearly, or annually. It helps a business, an organization, or even an individual to manage the money effectively. A budget also helps in monitoring the performance of the people in the organization and helps in better decision-making.
Sales Budget and Selling
A budget is a financial plan designed by an undertaking for a definite period in future which acts as a major contributor towards enhancing the financial success of the business undertaking. The budget generally takes into account both current and future income and expenses.
A new CEO takes control of Do-Da Industries to turn it around (to make it profitable). Based on
By the end of the first year the company exceeded budgeted profits by 18%. The company’s controller knows his annual bonus depends on exceeding budgeted profit and that next year’s performance would unlikely be similar to this year’s. Profit must exceed budget by 10% before the controller’s bonus kicks in.
The controller realizes he can accrue some of next year’s expenses and defer some of this year’s revenue while still exceeding this year’s budgeted profit by 10%.
Required:
Why would the controller want to defer revenues but accrue expenses?
Is this ethical?
Why?
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