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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Practitioners argue that budgets impede the allocation of organizational resources
Encourage myopic decision making and other dysfunctional budget games
Traditional budgeting is financial, top-down and has a command-and-control orientation (Schmidt 1993; Bunce et al., 1995)
Two practice-led developments in budgeting
Improving the budgeting process
Abandoning the budget
There are apparent disconnects between budgeting practice and research
By the time budgets are used, their assumptions are typically outdated
Time-consuming
Add little value
Based on unsupported assumptions and guesswork
Developed and updated too infrequently
Budgetary controls impose a vertical command-and-control structure
Constrain responsiveness
Rarely strategically focused
Concentrate on cost reduction
Strengthen vertical command-and-control
Encourage gaming and perverse behaviours
Organizational and people-related budgeting issues
Do not reflect the emerging network structures
Reinforce departmental barriers
Make people feel undervalued
Schmidt (1992) and Hope and Fraser (1997) support the perception of widespread dissatisfaction with budgeting in practice
Seems odd that the vast majority of US firms retain a formal budgeting process (97 percent of respondents in Umapathy (1987))
Budgets are so deeply ingrained in an organization’s fabric (Scapens and Roberts, 1993)
Budgeting is “the only process that covers all areas of organizational activity” (Otley, 1999)
Both approaches discussion were developed by the Consortium for Advanced Manufacturing-International (CAM-I)
Developed by the US based CAM-I
Focuses on generating a budget from an activity-based model of the organization
Contends that budgeting serves primarily a planning role and that budgeting suffers because the financial-oriented, higher-level budgeting process is not adequately connected to the underlying operational model of the organization
Closed Loop Model provides the foundation of the ABB approach
Create an operationally feasible budget before generating a financial budget
The operational loop uses AB concepts to convert the estimated demand for products and services into activity requirements using activity consumption rates and then translates activity requirements into resource requirements using resource consumption rates
The organization can adjust the quantity of demand, resource capacity, resource consumption rates, or activity consumption rates
The financial loop develops a financial plan based on the operational plan
Once the organization knows the demands, activities, and resources, it determines the cost of resources, traces them to activities, and then to products/services
If the initial financial plan is not balanced, the ABB approach allows the organization to adjust 5 possible elements to achieve the budget target
Activity and resource consumption rates
Resource capacity
Resource cost
Product/service demand quantity
Product/service price
This is better than the traditional budgeting process because it does not collect information on activity and resource consumption rates like ABB
The ABB-approach avoids unnecessary calculations of the financial effect of operationally infeasible plans
Because it incorporates batch, facility, and other types of cost drivers not found in traditional budgeting systems, it highlights the sources of imbalances, inefficiencies, and bottlenecks
Lower-level managers and employees can...
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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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