Implementing Budgets Flashcards
(36 cards)
What can be a pitfall of a budgetary control system?
want it to motivate but can end up producing negative reactions
- people having poor attitudes
- focus on short term not long
Goal Congruence
when individuals make decisions that are in their self-interest as well as best interest of organisation
Dysfunctional Decision Making
occurs when goal congruence doe not exist or is impaired
- decisions made that promote self-interest at expense of interest of organisation
How can managers be kept motivated within budget system?
- being involved in planning process
- means not set unachievable levels
- acceptable rewards
- informed of any changes
- understand their part in whole process
Top-down budget
- imposed
- set without allowing budget holder to have opportunity to participate in process
When would a top-down budget be appropriate?
- new organisations
- small businesses
- in times of economic hardship
- when operational managers lack budgeting skills
Bottom- up Budget
ensures all budget holders given opportunity to participate their own budgets
What are the advs of bottom-up budget?
- staff involved have most accurate knowledge of operations
- more achievable targets
- boost morale & motivation
- reduces workload of top management
What are the disadvantages of bottom-up budget?
- time consuming
- budgetary slack with too easy targets set
- never reach agreement
- staff may lack knowledge/skills
What is the process of creating a budget often used in practice?
- different levels of management agree process through negotiations
What are the key features of feedback on budget targets?
- clear & comprehensive
- identify controllable costs
- timely
- accurate
How does the budget constrained style of evaluation work?
managers performance ensured on their ability to meet budget
How does the profit conscious style of evaluation work?
managers focus on increasing effectiveness of units operations
- goal is to generate positive return to shareholdersH
How does the non-accounting style of evaluation work?
- non financial
- using measures such as feedback from colleagues
Budgetary Slack
difference between minimum necessary costs and costs built into budget/actually incurred
What can happen in manager is under pressure to achieve short term budget targets?
- slack or manipulation
- deliberately overestimate costs and underestimate sales so not blamed for overspending or poor results
Profit sharing scheme as incentive
- employees receive a certain proportion of companys year end profits
- bonus would still be related to position & length of employment
What are the advs of profit sharing scheme?
- only pay what can afford as % of profits
- can be paid to non-production personnel as well
What are the disadvantages of profit sharing scheme?
- must wait until end of year if not more = long term commitment
- profit affected by factors outside of employees control
- if too many employees involved won’t achieve motivating effect
Share Option Scheme
- gives member the right to buy shares in company at a set date in the future
- price usually determined when set up
Employee Share Scheme
- scheme acquires shares on behalf of number of employees
- must distribute within certain number of years of acquisition
What are the advs of Share scheme options?
- employees feel have stake in business
- may offer incentive to make decisions that focus on long term benefits
What are the disadvantages of share scheme options?
- benefits not certain as market value can’t be predicted
- benefits not immediate
Value added
- alternative to profit as a business measure of performace
- used as basis of an incentive scheme
= sales - costs of bought-in materials and service
