Organic Foods Ltd, a manufacturer of breakfast cereals and healthy snack bars, has experienced several years of steady growth in sales, profits, and dividends while maintaining a relatively low level of debt. The board of directors has adopted a long-term strategy to maximise the value of the shareholders investment. To achieve this goal, the board of directors established the following financial objectives for the next five years:
■ Increase sales by 12 per cent per year.
■ Increase profit before taxes by 15 per cent per year.
■ Maintain long-term debt at a maximum of 16 per cent of assets.
These financial objectives have been attained for each of the past three years. At the beginning0f last year the president of Organic Foods, Andrea Donis, added a fourth financial objective: maintaining cost of goods sold at a maximum of 70 per cent of sales. This goal was also attained last year.
The company’s budgeting process is to be directed towards attaining these goals in the forthcoming year. This is a difficult task as the economy is in the middle of a prolonged recession. In addition, the increased emphasis on eating healthy foods has driven up the price of ingredients used by the company at a much greater rate than the expected rate of inflation. John Winslow, management accountant at Organic Foods, has responsibility for preparation of the budget for next year. Winslow has assured Donis that he can prepare a budget that will satisfy all of the financial objectives. Winslow will do this by overestimating the ending inventory and reclassifying fruit and grain inspection costs as administrative rather than manufacturing costs. The actual statements for last year and the budgeted statements next year that Winslow prepared are as follows:
The company paid dividends of $27 720 last year, and the expected tax rate for the coming year is 34 per cent.
1. Describe how budgeting relates to a firm’s strategic planning process.
2. Provide calculations to evaluate whether or not John Winslow’s budget attains each of the financial objectives. Use the following format for your answer:
(b) Attained/Not attained.
3. Explain whether or not the adjustments contemplated by John Winslow are unethical. (You might like to revisit the discussion of ethical conduct in Chapter 1.)