The director of marketing for Eastern Computer Co., Callie Keller, had the following discussion with the company controller, Isaiah Johnson, on July 26 of the current year: Callie: Isaiah, it looks like I'm going to spend much less than indicated on my July budget. Isaiah: I'm glad to hear it. Callie: Well, I'm not so sure it's good news. I'm concerned that the president will see that I'm under budget and reduce my budget in the future. The only reason that I look good is that we've delayed an advertising 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 advertising campaign and 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 in actual spending month to month. What's really important is staying within the budgeted targets for the year. Does that look as if it's going to be a problem? Callie: I don't think so, but just the same, I'd like to be on the safe side. Isaiah: What do you mean? Callie: 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 and convention space and 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. Callie: What's 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 Callie Keller's request to expense the advanced payments for convention-related costs against July's budget?
Please understand the following. The director of marketing is given a budget for expenses every month. The director of marketing is expected to stay within the budget every month. The director of marketing feels that if he under spends during a month his budget for the same month next year will be reduced. On the other hand if his expenses for the month are far greater than the budgeted amount he will be penalized by the president for overspending.
The controller of finance tries to explain that if the director of marketing stays within the overall ...
This solution gives an indepth discussion on expensing.