Reference no: EM13938647

Case: ETHICAL CONSIDERATIONS; FLEXIBLE BUDGETING AND THE ENVIRONMENT

Harry Johnson, the chief financial officer of Ur Thrift, Inc, a large retailer, had just finished a meeting with the Roger Swasey, the chief financial officer of the large retailer, and Connie Baker, its environmental officer. Over the years, Harry had over- seen the development of a number of cost formulas that allowed Ur Thrift to budget the variable costs of a variety of items. For example, packaging for one of its private line of dolls had a cost formula of Y ¼ $2.20X, where X represented the number of dolls sold. The formula was used to calculate the expected packaging costs which were then compared with the actual packaging costs. Over the last several years, the actual costs and budgeted costs were virtually on target, prompting Harry to claim that packaging costs were well controlled.

Connie Baker, however, argued that the packaging costs were not well controlled. In fact, she was adamant in her view that the packaging was excessive and that by reducing the packaging, costs could be reduced and the environmental impacts reduced as well. She argued that the company had an ethical obligation to reduce environmental impacts and that cost savings would also be captured, improving the profitability of the company. As another example, Connie discussed the fleet of trucks used by Ur Thrift to move goods from its warehouses to retail outlets. The fuel cost formula was $3X, where X represented gallons of fuel consumed. She pointed out that the performance data also revealed that fuel costs were in control. Yet her office had recently recommended the installation of an auxiliary power unit to heat and cool the cabs of the trucks during the mandatory ten-hour breaks required of its drivers, thus avoiding the need to have the engine idle during this rest period. She claimed that this would significantly reduce fuel costs and easily pay for the new aux- iliary units in a short period of time.

Connie had also made some comments that caused Harry to pause and do some soul searching. She noted that the financial officers of the company should be more concerned about reducing costs than simply predicting what they should be. Thus (according to her view), cost formulas are useful only to tell us where we currently are so that they can be used to assess how to reduce costs. The so-called flexible budgets are simply a means of enforcing static standards. She also said that the com- pany's managers had an ethical obligation to not overconsume the resources of the planet. She urged both Harry and Roger to help position the company so that it could reduce its environmental impacts.

Required:

1. Do financial officers have an ethical obligation to help in reducing negative environmental impacts? Identify and discuss which of the Institute of Management Accountant's ethical standards might be used to sustain this point of view. Also, describe the role that flexible budgeting may play in reducing environmental impacts.

2. Suppose that Harry and Connie embark on a cooperative effort to eliminate any excessive packaging. The projected results are impressive. The expected reductions will save $3 million in shipping costs ($0.50 per package), $1.5 million in packaging materials ($0.40 per package), 5,000 trees, and 1.25 million barrels of oil. Are there any ethical issues associated with these actions? What standards might apply?

3. Identify two potential ethical dilemmas that might surface in the use of flexible budgeting for performance evaluation (the dilemmas do not need to be connected with environmental activities).