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problem: The director of marketing for Mobile Computer Co., Sheri Keller had the following discussion with the company controller Isaiah Johnson, on July 26 of the current year:

Sheri: Isaiah, it looks like I'm going to spend much less than indicated on my July budget.

Isaiah: I'm glad to hear it.

Sheri: Well, I am not so sure it's good news I am concerned that the president will see that I'm under budget & reduce my budget in the future. The only reason that l look good is that we've delayed an adverting campaign once the campaign hits in September, I'm sure my actual expenditures will go up. You see, we are also having our sales convention in September. Having the adverting campaign & the convention at the same time is going to kill my September numbers.

Isaiah: I don't think that's anything to worry about We all expect some variation on actual spending month to month. What’s really important is staying with the budgeted targets for the year. Does that look as if it’s going to be a problem?

Sheri: I don't think so, but just the same, I’d like to be on the safe side

Isaiah: What do you mean?

Sheri: Well this is what I'd like to do. I want to pay the convention-related costs in advance this month. I'll pay the hotel for room & convention space & purchase the airline tickets in advance. In this way I can charge all these expenditures to July's budget. This would cause my actual expenses to come close to budget for July. Moreover when the big advertising campaign hits in September, I won't have to worry about expenditures for the convention on my September budget as well. The convention costs will already be paid. Thus, my September expenses should be pretty close to budget.

Isaiah: I can't tell you when to make your convention purchases but I'm not too sure that it should be expensed on July's budget.

Sheri: What is the problem? It looks like "no harm, no foul" to me. I can't see that there's anything wrong with this-it's just smart management.

How should Isaiah Johnson respond to Sheri: Keller's request to expense the advanced payments for convention related loss against July's budget?

Basic Finance, Finance

  • Category:- Basic Finance
  • Reference No.:- M916546

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