This website uses cookies to ensure you get the best experience on our website. Learn more

Accounting Notes Management Accounting, Budgets and Behaviour Notes

Topic 2 Reading Practice Developments In Budgeting Notes

Updated Topic 2 Reading Practice Developments In Budgeting Notes

Management Accounting, Budgets and Behaviour Notes

Management Accounting, Budgets and Behaviour

Approximately 56 pages

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...

The following is a more accessible plain text extract of the PDF sample above, taken from our Management Accounting, Budgets and Behaviour Notes. Due to the challenges of extracting text from PDFs, it will have odd formatting:

Introduction

  • 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

Problems with Budgeting in Practice

  • By the time budgets are used, their assumptions are typically outdated

  1. Time-consuming

  2. Add little value

  3. Based on unsupported assumptions and guesswork

  4. Developed and updated too infrequently

  • Budgetary controls impose a vertical command-and-control structure

    1. Constrain responsiveness

    2. Rarely strategically focused

    3. Concentrate on cost reduction

    4. Strengthen vertical command-and-control

    5. Encourage gaming and perverse behaviours

  • Organizational and people-related budgeting issues

    1. Do not reflect the emerging network structures

    2. Reinforce departmental barriers

    3. 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)


Practice Developments in Budgeting

  • Both approaches discussion were developed by the Consortium for Advanced Manufacturing-International (CAM-I)

Activity-Based Budgeting Approach

  • 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

Advantages

  • 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...

Buy the full version of these notes or essay plans and more in our Management Accounting, Budgets and Behaviour Notes.