Since Mitch Banks had become president of Alberta
Mining, Ltd., budgets had become a major focus for managers. In fact, making
budget was such an important goal that the two managers who had missed their
budgets in 2007 (by 2 percent and 4 percent, respectively) were fired. This caused
all managers to.be wary when setting their 2008 budgets.
The GSL copper division of Alberta Mining had the following results for 2007:

Sheila Masur, general manager of GSL, received a memo from Banks that
stated:
“We expect your profit for 2008 to be at least $209,000. Prepare a budget
showing how you plan to accomplish this.”
Masur was concerned that the market for copper had recently softened. Her
market-research staff forecast that sales would be at or below the 2007 level and
prices would likely be between $0.92 and $0.94 per kilogram. Her manufacturing
manager reported that most of the fixed costs were committed and there
were few efficiencies to be gained in the variable costs. He indicated that a 2 percent
savings might be achievable, but certainly no more.
1. Prepare a budget for Masur to submit to headquarters. What dilemmas
does Masur face in preparing this budget?
2. What problems do you see in the budgeting process at Alberta Mining?
3. Suppose Masur submitted a budget showing a $209,000 profit. It is
now late in 2008, and she has had a good year. Despite an industrywide
decline in sales, GSL’s sales matched last year’s 1.6 million kilograms,
and the average price per kilogram was $0.945, nearly at last
year’s level and well above that forecast. Variable costs were cut by
2 percent through extensive efforts. Still, profit projections were
$9,000 below budget. Masur was concerned for her job, so she
approached the controller and requested that amortization schedules
be changed. By extending the lives of some equipment by two years,
$15,000 of amortization could be saved in 2008. Estimating the economic
lives of equipment is difficult, and it would be hard to prove that
the old lives were better than the new proposed lives. What should the
controller do? What ethical issues does this raise?

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Sales, 1.6 million kilograms @ $0.95/kilogram $1,520,000 Variable costs Fixed costs, primarily amortization Pretax profit 880,000 450,000 $ 190,000