impact of budgets on behaviour Flashcards
(14 cards)
what type of process is budgeting at its heart?
social!
despite increasing use of computers, must always be remembered that still a social process. budgets are negotiated, agreed, enforced by people and not a mechanical tool/objective technique.
budgets can be seen as unpopular, oppressive, limiting to activities, threatening, restrictive. effective admin of budgets needs to convince mgrs that it’s a positive tool designed to help.
what are good practices that can maximise value in budgeting?
employees need to accept the budget. good practices:
- top mgment support
- feedback - timely!
- flexibility - budget is means to an end, not the end itself. environment and human nature induce uncertainty and budget will not always be met. should be adaptable not concrete
- employee pption
- length of budget period - relate to nature of business
- using variances - use them to raise questions and direct attention not to blame
what should be considered when deciding the degree of employee participation in a budget?
if seeing too difficult to achieve, may simply view it as unrealistic and give up even trying. more likely when employees feel budget is imposed by higher mgment, but if they set it themselves they may put in too much slack.
must decide on the degree, balance potential for setting a budget at too low with employee acceptance.
how can budgets impact motivation and cooperation?
must provide incentive, otherwise mgrs will approach responsibilities in cautious manner. adverse variances attract investigation and censure but no incentive to achieve favourable ones. failure to separate non-controllable costs can alienate mgrs completely
what does goal congruence in budgets depend on?
reliance on budgetary control systems doesn’t always result in goal congruence. success of system depends on people who operate and are affected by it, they must work within the system in an understanding and cooperative manner. can only be achieved by individuals who have total involvement at all stages in budget process.
what is often found in terms of budgets and goal congruence?
budget used as a pressure device, if perceived as a stick with which to beat people it will be sabotaged in subtle ways
the process and control exercises engender competition between depts and execs. mgrs may be inclined to meet budget in ways not beneficial to interests of the org as a whole
what is an essential element in budgetary control?
performance evaluation. actuals vs budget or standard. evaluation isn’t just about business performance but the related mgrs too. purpose of control is to encourage mgrs to behave in best way for organisation.
what should happen when adverse vs favourable variances are reported in budgetary reviews?
when adverse variances are reported: implies poor performance, if unable to correct/explain, may suffer negative sanctions. forgo salary increases or be demoted.
when favourable variances reported: positive inducements may be offered to encourage mgrs to avoid adverse variances, those who meet budget may be granted bonus/promotion/perk
mgrs then have incentive to ensure dept or operation achieves budget. however, control system is capable of distorting the process its meant to serve or ‘the tail wags the dog’. enforcement of a budgetary control system requires sensitivity if this is not to happen.
what are planning and operational variances?
standard set as part of budgeting process, which occurs before period to which it relates. difference in BvA may arise partly due to unrealistic budget and not solely due to operational factors. budget may need to be revised to enable actual performance to be compared with a standard that reflects these changed conditions.
traditional variance - compares actuals vs original/flexed budget
planning variance - compares revised flexed budget and original flexed budget. often deemed uncontrollable. mgment should not be held accountable
operational variance - compares actuals with revised flexed budget. deemed controllable and mgment held responsible for.
planning and operational variances may be calculated for sales / materials / labour, the operating statement would include a separate line for each variance calculated.
what are the pros of using planning and operational variances?
in volatile and changing environments, var analysis more useful using this approach
operational variances provide up to date info about current levels of efficiency
op variances are likely to make standard costing system more acceptable and have a positive effect on motivation.
emphasises importance of planning function in prep of standards and helps to identify planning deficiencies.
what are the cons of using planning and operational variances?
element of subjectivity in determining ex-post standards as to what is realistic
there is a large amount of labour time involved in continually refreshing standards and calculating variances.
great temptation to put as must as possible of total variances down to outside factors i.e. planning variances
can then be a conflict between operating and planning staff, each laying blame at each others door
finally, there is a significant problem of data collection for revised analytics - where does it come from and how can we say with certainty what should have been known at a particular point in time?
how does negotiation impact the budgetary control system?
normally arrive at budgets by process of negotiation with mgrs concerned. may actually be initiated by mrgs and corrected by budget officer. clearly, mgr has incentive to negotiate ‘easy’ budget - aka paddling the budget or budgetary slack. if they succeed, the control exercise is damaged. comparison of BvA isn’t meaningful measure anymore and mgr can include inefficiencies in the operation if they want. successful mgrs can become hard negotiators, but the negotiations are with colleagues not clients and infighting may become part of the process. finally, time and energy is distracted by all this paddling
how can budgetary control systems lead to mgrs trying to influence accounting policies?
any mgment accountant engaged in prep of fincon reports will be familiar with mgrs trying to influence policies used. apportionment of indirect costs often subjective, and can have considerable impact on how performance is perceived. this creates scope and incentive for arguments. if mgr perceives dept’s performance is falling below budget, may sift through costs and demand they be reclassified elsewhere. time and energy this takes takes away from mgment of business
what are the three budget constrained mgment styles?
- conservative approach to new business opportunitiesimmediate impact of new venture is rise in capital and operating costs, adverse impacts on period’s profit. may mean it gets turned down
- unsatisfactory corporate culturebudgetary control as an approach involves sitting in an office and reading financial reports. such an approach may result in culture based on hierarchies and divisions. large orgs often take on rigid character
- favour projects amenable to budgetprojects with little uncertainty and few unknowns, or uncertainties if they have some combo of high expected returns and low cost interim exit routes - but a budget constrained mgr may be disinclined to adopt such projects anyway. may be particularly bad in dynamic and turbulent business environment.
