Accounting Notes Management Accounting, Budgets and Behaviour Notes
AC310: Management Accounting, Financial Management and Organizational Control - Module 3 (Management Accounting, Budgets and Behaviour).
These notes cover the third module of the AC310 Management Accounting course at LSE which covers the following topics: Budgeting issues, the no-budgeting option, contingency theory, organisational participation, understanding how budgets impact people, and how people impact operations and capital budgets in organisations, through the lens of different organisat...
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Budgets are often strongly criticized by practitioners and academics (Wallander, 1999; Hope and Fraser, 2003; Jensen, 2003)
Most criticism focuses on the use of budgets for evaluation reasons (Jensen, 2003)
But budgets might also be used for planning and control reasons (Merchant and Van der Stede, 2003)
Rolling forecasts are argued by practitioners to be a substitute for the annual budget (Bogiages, 2004)
10 possible operational reasons for budgets in organizations
Three key performance evaluation constructs used in budget research are budget emphasis, budget participation and budget use
Budget emphasis construct considers the focus given by an organization to the budget (Hopwood, 1972)
Participative budgeting construct considers the extent of staff input into the setting of budgets, for the purpose of understanding its effects on staff evaluation (Milani, 1975)
Budget use construct has been defined as the role of budgets for formal performance evaluation in the work unit (Hoque and Hopper, 1997)
Recent research has begun to focus more explicitly on the use of budgets for reasons other than evaluation (Hansen and Van der Stede, 2004)
Hansen and Van der Stede (2004) identified two operational reasons to budget
Planning
Evaluation
They found that resource traceability and the competitiveness of an environment was positively related to the importance of budgeting for performance evaluation
But unrelated to the importance of budgeting for operation planning
Staff evaluation
Mia, 1993; Lau et al., 1995; Hansen et al., 2003)
Business unit evaluation
Often discussed in tandem with staff evaluation (Milani, 1975)
However, Sivabalan et al., argue that they are not always similar
In a high uncertainty environment, organizations may not use budgets to evaluate staff due to the difficult predictive circumstances making the budget an irrelevant performance benchmark
However, in the same setting, organizations may still want to know how a business unit has been performing relative to a budget
Coordination of resources
Organizations often create budgets in order to inform departments and other organizational units about their funding constraints, prior to period commencement
Process of requesting and negotiating budget funds
Formulation of action plans
In many organisations, budgets assist in costing a range of alternative courses of action
Management of production capacity
Through standard costing variables such as the ‘normal capacity’ value, budgets allow organizations to reflect on their level of activity and the extent to which they utilize their operating capacity (Langfield-Smith etl al., 2005)
Determination of required selling prices
The use of standard costing systems in many organizations requires the implementation of forecast numbers to cost products in advance (Langfield-Smith et al., 2005)
Directly impacts upon the determination of selling prices
Encouragement of innovative behavior
Through the planning process, organizations can increase the amounts allocated to specific areas of business, to stimulate certain types of behavior amongst staff
Subramaniam and Mia (2003) find that the allocation of more flexible budget-based evaluation suited marketing managers due to their greater emphasis...
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AC310: Management Accounting, Financial Management and Organizational Control - Module 3 (Management Accounting, Budgets and Behaviour).
These notes cover the third module of the AC310 Management Accounting course at LSE which covers the following topics: Budgeting issues, the no-budgeting option, contingency theory, organisational participation, understanding how budgets impact people, and how people impact operations and capital budgets in organisations, through the lens of different organisat...
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