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Topic 4 Reading Management Control Without Budgets Notes

Accounting Notes > Management Accounting, Budgets and Behaviour Notes

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"Management control without budgets: A field study of 'beyond budgeting' in practice" (Ostergren and Stensaker, 2009)

"Management control without budgets: A feld study of 'beyond budgetng' in practce" (Ostergren and Stensaker, 2009)

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European practioners have proposed the beyond budgeting approach (Hope and Fraser, 2003) Argument against budgets is that they encourage myopic decision making and other dysfunctional budget games (Wallander, 1999) o There is also a lack of connection with corporate strategy (Lukka, 1988) o Impedes allocation of organizational resources to their best uses The Balanced Scorecard specifically links performance measures with espoused strategy in order to reduce de-coupling between strategy and operational management (budgeting and action) Simon's 'levers of control framework' (1995) also combines a focus on strategy with a wider view of the control mechanisms that can be utilized to implement strategy Literature lacks a deeper understanding of the practical implications of removing budgets Traditional, accounting research has emphasized one innovation at a time o But Beyond Budgeting, a whole system of controls is implemented
? 'control packages' (Malmi and Brown, 2008) Some researchers are arguing that MCS can assist and even promote entrepreneurship and innovation (Davila et al., 2009) Beyond budgeting is broken into two principles: o Leadership principle = focus on customer outcomes, organize as a network of lean accountable teams, enable everyone to act and think like a leader, give teams the freedom and capability to act, govern through a few clear values, goals and boundaries and promote open information for self-management o Process principle = Set relative goals for continuous improvement, rewards should be shared, success based on relative performance, planning should be continuous and inclusive process, controls should be based on relative indicators and trends, resources should be available as needed and coordinate interactions dynamically Ostergren and Stensaker draw on agency theory to understand the new rules of action and altered interaction plans

Background and Theoretcal Perspectves

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The budget aims at promoting coordination and communication among sub-units within the company, provides a framework for judging performance and finally motivating managers and other employees (Horngren et al., 2005) Criticisms of budgets: o Too time consuming o Impose a vertical command-and-control structure
? Incompatible with flat, network or value-chain-based organizational designs with empowered employees (Wallander, 1999) o Centralized decision-making o Stifles innovation and initiative o Focus on cost reduction rather than value creation (Wallander, 1999, Hansen et al., 2003) Behavioural consequences of relying solely on budgets: o Failing to create a high performance climate based on competitive success because a fixed target is the definitive measure of success o Failing to make people accountable for satisfied customers because financial performance measures dominate o Failing to empower people to act by providing them with resource capabilities because resources have been committed for the budgeting period

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