Ann Paxton is a manager at the waste treatment facility for the city of Columbus park, I Illinois. Part of her job requires her to prepare an annual expense budget. She is required to submit a budget for their department for the upcoming year so the company can properly allocate expenses and predict profitability. She assumes that her company with process around 9,000,000 gallons of waste with the variable cost of 0.20 dollar per gallon and the fixed costs of 1,400,000 dollars. The total cost for her company will be around 3,200,000 dollars. She is contemplating if she should increase the budget from 3,200,000 dollars to 3,900,000 dollars. She believes that the increase will allow her to overcome some potential drawbacks. One of which is that she is concerned that city controllers will reduce the budget by 10 percent, which will put her over the budget. Secondly she is worried that she might process more waste than she has budgets, which can raise her variable cost significantly. And finally a new labor contract could increase cost by more than 200,000 dollars. But most importantly if she submits a higher budgets and her cost are lower than the budget then she will earn a promotion out of the waste department that she despises.
Budgets have two primary functions – planning and control. Organizations need to decide which to emphasize, since the budget’s effectiveness is a function of how top management uses it. If the budget is to be used as a planning tool, it must be closely linked to the organization’s strategic planning process; whereas if it is used for control, the level of flexibility to allow in the process is an important decision. As a general rule, large companies concerned with efficiency should emphasize the control aspects of the budget; whereas smaller innovative firms should stress planning (Carreras et al., 2011).
Ann Paxton is in a predicament as annual budgets are always difficult to come up. The budgets are based on the historical
