ACC 333 (De Meyst)

In-Class Activity - Budgeting At Advanced Technologies

Five years ago, Jack Cadence and two colleagues left their positions with a large industrial firm to start Advanced
Technologies Company (ATC), a software design firm. Cadence, the major owner, obtained venture capital, and
ATC began work on the design of a unique software package to make cloud computing easier for firms. Market
acceptance of the completed software package has been quite good, and Cadence has been able to raise additional
capital to operate during the initial stages of product marketing.

Cadence focuses his efforts on managing the company, while the other two minority owners focus on product
design and development. ATC has now began development of a new software package which will allow more
effective usage of the power of cloud computing.

Because of the continued sales growth of the initial software product and the ongoing development of new
products, Cadence hired several highly experienced marketing, sales, and production managers, and has allowed
them to build staffs for their departments. In addition, Cadence hired Jeff Cross, a senior accountant with
budgeting experience. Currently, there are 70 ATC employees across the marketing, sales and production
departments, and Cross is in charge of financial operations.

Cadence decided that because of ATC’s growth, a formal budgeting process should be established. Cadence has
asked Cross to work with him to develop the initial budget for ATC.

Because the senior managers at ATC were new to the firm, Cadence forecasted sales revenues himself, based
on his projections for the market growth of the existing products and the potential markets for the new
products. He then prepared production and related expense projections based on these sales figures. Cross then
took this information and broke it down into individual departmental budgets, and then consolidated these
individual budgets into the overall budget for ATC.

Cadence and Cross went through several iterations of these steps until they were satisfied with the budgets. They
then distributed both the consolidated budget and the individual departmental budgets to the managers and their
staffs, along with a cover letter that advised that ATC was adopting a formal planning procedure, and that
everyone in the company should work together to achieve the objectives set out in the budget to continue the
company’s successful and growing operations.

Several of the departmental managers were displeased with how this planning process had been undertaken. In
discussing the situation amongst themselves, they felt that many of the budget projections were overly optimistic
and could not be reasonably attained.

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ACC 333 (De Meyst)

In-Class Activity Questions - Budgeting At Advanced Technologies

1) What might Cadence hope to gain from the introduction of a formal budgeting system? With the budget
system as it is, which of these is he likely to gain?
Cadence would hope to gain a sense of organization and motivation from his employees to help stay on target with his budget.
He hopes that his strategic goals will be met by his employees, with regards to meeting targets for the budget. With the
budget system as it is, he will likely not gain the motivation from his employees because they are displeased with his very
optimistic projections.

2) Did Cadence and Cross use a top-down or bottom-up budget process?

Top down budget process

What are some advantages and disadvantages of a bottom-up process?

+: Employees will have a say in budget so the budget would be more accurate and employees would be motivated to help reach
projections (making using of specific knowledge)
-: Employees could lie about projections for the budget so they do not have to work as hard or to get extra bonuses at the end of the
year (Budget Slack)

What are some advantages and disadvantages of a top-down process?

+: More efficient and helps assert power for the upper level management (firm wide views)
-: Lack necessary info for each departmental budget and employees will become unmotivated if projections are out of reach

Suppose that the departmental managers were not new to ATC, but had been employed there for two years.
What impact might this have on the budgeting process used by ATC?
If they been there for more than 2 years, they could create a more realistic budget because they know what they can
produce in a given year. Cadence may have switched to a bottom-up process because the lower level managers know more
info about projections for their specific departments.

3) Several of the departmental managers believe that the budget projections are too optimistic and not
realistically attainable. How might this impact their behavior?
The departmental managers would be unmotivated to reach the unattainable projections. The company culture would be
negatively impacted.

What might Cadence have done in the budgeting process to reduce the chance that the managers would not
“buy in” to the budget?
Give the departmental managers a say in the budget projections for their departments so they have a voice in the project. This will
help keep the managers motivated.

Suppose that at the end of the year, departmental managers did in fact reach their budget goals. What might
they worry about in next year’s budget?
Unexpected events could cause them to not reach their budget the following year. They would worry that the new budget may have
the same or even higher projections from the previous year. (use ratcheting)

4) Suppose that Cadence intends to compare the departmental managers’ performance to their departmental
budgets once a year, in preparation for their annual performance review. From the managers’ perspectives,
what concerns might this raise? How might Cadence address these concerns?
Might be worried about uncontrollable events. The firm might include more non financial performance measures in the budget.
More performance reviews, adjustments can be made quarterly. Not holding managers accountable for uncontrollable

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ACC 333 (De Meyst)

events. At the end of the year, if you know the target will not be reached, new targets can be made for the performance
measures.

5) Suppose that Cadence decided that if department heads do not spend all the amounts in their budgets, the
funds remaining at the end of the year will not be rolled over into the following year’s budget. What
advantages are there to ATC to this policy? What impact might this have on the department heads’
spending, and why will they behave this way?

+: Prevents risk averse managers from having control. Never will be a waste of budget.
-: Spend unnecessary amounts of money so they do not get their budgets cut.

(Budget Lapsing)

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