MANAGERIAL ACCOUNTING

Report on a case study: Case Tasty Carrot Budget

Prepared by:
NAME: IBRAHIM AMMAR ALDULAIMI
MN. (P106967)

Supervised by: Prof. Dr. AMIZAWATI BT. MOHD AMIR

UKM /2021/EPA6214
e-mail: amiza@ukm.my
Table of Contents
PARTICIPATIVE BUDGET PROCESS

QUESTION (1)
BEHAVIORAL BENEFITS
OPERATIONAL BENEFITS

QUESTION (2)
ASSUMPTION
INAPPROPRIATENESS
BUDGET PLANNING BY INEXPERIENCED TEAM MEMBER

QUESTION (3)
BUDGETARY SLACK
Participative Budget Process:
What is Participative Budgeting?
Participative budgeting is a method of budgeting wherein both the people, who implement the budget
and who will be affected by the budget, are involved in the process of budget creation.
A process includes all the individual in the making of budget and has an impact on the budgetary
targeted which need to be evaluated. This is most likely to happen to improve and maintain the
relationships between different participants, managers, and other organizational members as it affects
their and firm’s performance (Adison et al., 2018). A budget with active participation is more
attainable.

Advantages of Participative Budgeting

1. It is better for motivation because it boosts the morale of employees.
2. Participation puts the responsibility on the employees. ...
3. It increases employees job satisfaction. ...
4. Employees put more effort to achieve the standards they have set for themselves.

Disadvantages of Participative Budgeting

1. It is time-consuming for lower management.
2. Participative budgeting involves a large number of people. Hence, resulting in high labor cost.
3. Focus on individual department growth is more.

When to go for Participative Budgeting?

1. When the employees are old, experienced and skilled in their task, participative budgeting gives
excellent results.
2. Participative budget can be really helpful in a diversified business, where there are various needs
of different departments.
3. When the top managers have other important tasks to give attention to, the implement this style.
4. In the case of a new manager, which is new to the business. Due to less experience in the ground
level scenario, he has to take suggestions from the bottom level people.
QUESTION (1): Explain the operational and behavioral benefits that are
generally attributed to a participative budget process?
Answer
Budgetary process refers to the system with which the governments or companies creates and
approves budget. Budgeting is the means to allocate funds and limit of expenditure for a particular
department. It set a limit and allocates particular amount for working and development of a particular
department or sector. It is a very important tool which helps the organizations and also the government
to have a check on funds utilized. A budget if properly prepared helps to provide operational and
productive efficiencies in all divisions of an organization ( Horngren , 2013). There are both
behavioural and operational benefits of budgeting process.

Behavioural Benefits: The behavioural benefits of budgetary process involves that it ensures that
all the important issues in connection with an expense are included. This process also helps to ensure
that the employees understand the importance of their roles in meeting the organizations goal and they
put in more effort to fulfil their responsibilities. The budgetary process provides the organization with
an opportunity to solve problems which are most of the time not noticed by anyone (Drury, 2011,
2018). The employees are also motivated to fulfil their goals with the help of budgetary process; it
gives them an initiative and a goal with the motivation to achieve it. The most important benefit of
budgetary process is that it makes the people at all levels in an organization feel that their opinion is
important to the top management in their decision making.

Operational Benefits: The operational benefit of the budgetary process is that it helps to improve
the effectiveness of the spending by creating better investment opportunities for the organization
which impacts its efficiency level. With the flow of time, the management gets used to budget and
actual figures, which helps them create budget which are very accurate. The budget process
strengthens the overall financial performance and planning of an organization (Drury, 2018).
Therefore we see that budgetary process not effects the finance department but it also helps the
organization to improve its operational effectiveness. The budgetary process helps the organization
improve all its functions by cutting expenses and investing more wherever required (Williams, 2012).
The whole process of budgeting helps to provide control over ones money and focus on money goals
by involving participation of all the levels of an organization.
QUESTION (2): Identify deficiencies in Tasty Carrot’s participative budgetary
policy for planning and performance evaluation purposes. For each deficiency
identified, recommend how the deficiencies can be corrected?
Answer
Assumption: As an alternative to critical analysis, the manager did simple interest calculations. The
master budget was planned on the basis of several assumptions which do not take into account a strong
budget for the company. The budget has an impact on the company's overall level of efficiency,
productivity, operations, regulations, growth and performance and could not be formulated on the
basis of assumptions, but through critical thinking, analysis and several other factors that could impact
in future.
Inappropriateness: The new Master Budget was planned and the budget was reviewed by each
member of the meeting. In the coming year of the sweet carrot, the budget created shows no progress.
However, managers and others still talk about it for the future. This inadequacy will lead to an
enormous loss, so that the company can decide which budget will be useful.

Budget Planning By Inexperienced (new) Team Member: The newly hired controller
Nicole Quarterman from Tasty Carrots will be tasked with creating the New Year's budget to learn
more about the company. This is her first task and she conducts interviews with various division
managers of the company for budget preparation. As Jeff say 20 percent drop of sales , Nicola did not
quite accept his reasoning and she was not sure about that large drop he wanted her to use but as the
new member of the staff she was not sure what she should do. The inexperienced member's budgeting
can create problems for Tasty Carrots and because of this the company may face enormous crises.
Experienced members of the company that know the past and current development of the company, its
distinctive activities and tactics.

Finally, we can say that managers can determine their departmental budgets arbitrarily. The managers
should be advised to apply the minimum level approach best suited to their different divisions. It is
just as important to prepare the individual budget as the total budget. Any errors in the individual
budget affect the organization's overall financial plan (Graham & Smart, 2012).
QUESTION (3): As a controller, Nicole believes that the behavior described by
Jeff Barza could be unethical and that she might have the obligation not to support
this behavior. Explain why the budgetary slack could be unethical.
Answer
Budgetary Slack:
Budgetary slack relates to the practice of underestimating the revenues of the organization and
overestimate expenses when preparing a budget statement for the next financial period. It usually
occurs when the managers don’t consent to their supervisors, and sometimes managers create
budgetary slack to improve the performance of the organization. In other instances, budgetary slack
may be a result of the management adding unverified numbers, especially in highly competitive
industries where changes are common. Budgetary slack, on the other hand, can be ethical or unethical,
depending on whether it is used purposefully by the department to mislead the firm's top management
by underestimating revenue. The slack is usually established to deceive management, whether it is
legitimate or unethical. Due to the involvement of many employees of the organization, while making
a budget, the chances of budgetary slack get increased. The management needs to evaluate and analyze
the previous year's reports accurately, this might help them to correct the slack (Klein et al., 2019). A
true budget statement must be honest; it should reflect actual anticipated revenues and expenses.

The following are some of the common causes of a budgetary slack when preparing an annual budget
for the company:
1. Uncertainty on results expected: The managers of a company may face a lot of uncertainty
over the results expected in a future period. For example, when the company is introducing a new
product line, the managers lack actual data on the kind of results to expect. As a result, they will be
conservative when setting up the budget for the coming financial year to avoid promising beyond
what they can achieve. Budgetary slack may occur when the managers underestimate the expected
revenues to remain in a range that is easy to achieve for a new product line.

2. Information asymmetry: Information asymmetry occurs when one party possesses more
information about the subject than the other. In such a case, departmental-level managers may be
able to access private information about resource requirements, employee productivity, and
expenditures which the senior management may not be privy to.
The lower-level managers may take advantage of the information asymmetry to advance their self-
interest without the knowledge of the top management. They can set easy-to-achieve revenue
targets so that they can be seen to be working hard by the management, even when they are
guaranteed to outperform the previous year’s results.
3. Rewards dependent on budget attainment: In organizations where employee awards and
payoffs are dependent on budget attainment, lower-level managers may create budget slacks to
make the target easy to achieve. The subordinate managers are often under pressure from top
management to make sure that the set goals are achieved, which means that they can influence the
process to work in their favor.
As the managers perform supervisory roles, they know what is achievable and what resources are
required. They would, therefore, present a high budget for expenses while low-balling the expected
revenues target at a level that is easily attainable. This would make it easy for them to beat the set
targets in every period and enjoy the promised rewards, salary hikes, and job promotions.
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