Question

You've learned about the many benefits of master budgets, flexible budgets and standard costs in the past two chapters. Now it's time to consider the ethical implications of these managerial accounting tools.  

Required::

Consider how budgets and standards are used by managers to plan for the future and control operations. Do you believe that an organization's use of flexible budgets and/or standard costs promotes ethical behavior by its employees? Why or why not? Share your thoughts with your classmates. Explain with a few sentences please.

Answer 1

Budget means: An estimate of income and expenses for a set period of time.

Standards means: Something used as a measure, norm or model in comparative evaluations.

Managers/ Management uses these budgets and standards to evaluate the performance of the employees and their department. They can also use these to evaluate the performance of a business unit in a large business organisation or of the entire performance of a small business unit.

In these situations, employees may feel a tension between actual results and reporting results that reach the predetermined goals created by the budget. This creates a situation where managers may choose to act unethically and pressure accountants to report favourable financial results not supported by the organisation. Accountants need to be aware of these situations and use ethical standards when assisting the creation and development of budgets/ standards.