ABC company, a publically traded corporation, operates a regional chain of drugstores. Each drugstore is operated by a general manager and a controller. The general manager is responsible for the day to day operations, and the controller is responsible for the budget and finances. The general manager has been at ABC company for several years. Employee turnover at ABC company is high and a new controller has just been hired.

The controller was asked to prepare the master budget. Each retail location prepares its matter budget and then submits it to headquarters for approval. Once approved, the master budget is used to evaluate performance. The performance evaluations are directly tied to management's bonuses and whether additional company funds will be invested in a location.

When the controller is done completing the budget, the general manager instructed them to increase the amounts budgeted for labor and supplies by 20%. When asked why, the general manager responded that the budgetary cushion gives store management flexibility in running the store. The extra funds can be used to purchase new furniture or pay employee bonuses. The general manager also used the extra funds to pay employees incentives under the table to work extra hours or keep them from leaving for higher-paying jobs.

Question

What do you think about this budgeting process? Is adding the extra cushion into the budget ethical? What ethical issues arise in this situation? What are the controller's responsibilities? Would you feel comfortable adding the extra cushion into the budget, why or why not?