GREAT ZIMBABWE UNIVERSITY

DEPARTMENT OF ACCOUNTING AND INFORMATIONS SYSTEMS

Programme: Bachelor of Commerce Special Honours Degree [Accounting]

Module: Strategic Management Accounting (HSPAC 411)

Lecturer: Mrs Ranganayi

Due Date: 15 Nov 2021

Student: Milton Tendai Chinhoro

Due Date: 15 November 2021

Critically discuss the arguments for the use of budgeting in the implementation of
FOUR aspects of the performance cycle. (14 marks)
The use of budgeting in the implementation of four aspects of performance cycle is a critical
tool which leads to a situation where performance results become a central determinant of
budget funding decisions, thereby making budgeting a powerful instrument for maximising
organisational effectiveness and efficiency (Robinson 2009). The four aspects of performance
cycle are planning, monitoring, review and rewarding. Therefore, the use of budgeting in the
implementation of four aspects of performance cycle refers to the use of budgeting
information such as targets, or results or both in implementation of performance cycle. Use of
budgeting in implementing performance cycle can improve budgetary prioritisation (Grizzle,
et al 2002). This means improvement of allocative efficiency through the expenditure priority
decisions embodied in the budget itself. Hence, budgetary expenditure is classified in terms
of outcome/output groups. This calls for systematic gathering of performance information to
inform decisions about budgetary priorities between competing program.

During the planning stage where targets are set, results of past performance will be taken into account,
thus leading to efficient and effective allocation of resources. This means funding will be linked to
past performance, however judgemental element will be incorporated in the rating of past
performance. Good performance management cycle will provide good performance
information which is crucial input into the process of determining spending priorities in the
annual budget thus enhance allocative efficiency. Funding will be accompanied by the
explicit stipulation of the results which it is expected to deliver, with that funding the
proposition that performance standards or targets which are set for departments should be
clearly linked with funding decisions, as Shah and Shen, (2007) puts it. However, it is
possible to apply the payment for results system as a supplementary and subordinate element
in departmental or project funding, with the main bulk of funding taking the form of a ‘base’
allocation determined on some other basis (such as historical/incremental, or based on target
results) (Wellman, 2001). This is common in some areas of the public sector, for instance,
those university funding systems which include some funding based on performance on
outcome indicators such as graduate job placements, while the bulk of funding is determined
by expected student numbers (i.e. planned output quantity).

Use of budgeting in implementing performance cycle improve the efficiency and

effectiveness of expenditure by linking the funding of organizations to results they deliver,
making systematic use of performance information (Robinson, 2009). In comparison to
traditional line item budgeting, this system allows for more flexible use of resources and
transforms focus from inputs to results, as it focuses on the results to be achieved. Effective
performance will be required, which in turn entails monitoring the entire results-based chain
in order to understand and effectively manage projects. In addition, budgeting for results
needs a performance audit system that can assess management and operational performance
of departments within the organisation and administrative effectiveness of operations for
which managers are accountable.

It also results in performance improvement, which refers to the objective of promoting more
effective use of allocated funds by each department. This means both promoting productive
efficiency and to the extent that managers have devolved authority over the types of outputs
which are produced, also allocative efficiency. This can strengthen ex post link between
results and resources (Grizzle, et al 2002). This is a most worthwhile objective, and it is
therefore worth useful to consider the appropriate form such a linkage should take. The ex
post linkage between results and resources should be strengthened by formalized budgetary
incentives for the performance of managers. This means the rewarding aspect of performance
management cycle will be link with budgeting information. This will encourage the work
force to work towards achieving the set budget targets.

Use of budgeting in the implementation of four aspects of performance cycle can assist in
strengthening the ties between aspects of performance cycle. This means focus on results in
organisational performance will be enhanced. Hence, the budgeting process will not be just
about influencing the budget allocation. This can lead to the creation of a direct and explicit
link between individual employee remuneration and departmental budgetary funding levels
(Joyce, 2003). For instance, strongly-performing departments might be given budgetary
performance bonuses, with the bonus earmarked for the payment of performance bonuses to
departmental employees. Budgeting can also enhance performance culture and shared
responsibilities within performance cycle. There is no doubt that individual stakeholders’
participation is important. The concept of shared responsibility, however, goes beyond
shared participation and commitment to performance budgeting (Posner & Fantone, 2007).

Instead, use of budgeting in implementing performance cycle calls for systemic effort and
needs to anticipate the participation of one participant influencing another. In budgetary
decisions more participation by one actor does not necessarily mean better outcomes for the
performance system as a whole and the responsibilities need to be shared by important
budgetary actors to sustain performance budgeting in a meaningful way. In short, the use of
budgeting in implementing performance management cycle focuses on the purpose of the
expenditure and the end results/outcomes of the expenditures and provides data, which can be
used to evaluate those outcomes. This can result in efficiency and effectiveness in
expenditure by linking funding to results. However, use of budgeting in implementing aspect
of performance cycle is not without its costs.

Highlight THREE advantages that may be claimed for the use of activity based
budgeting rather than a traditional incremental budgeting system. (6 marks)
An organisation’s budget represents a quantitative plan or forecast for a future period of the
business. An activity-based budget is one of the many types of budgets which a business
organisation can use to basing on an activity or different types of activities in a business.
Activity-based budgets are different from traditional budgets which use the business’s
previous period’s budgets and adjust them taking into account future expectations for
inflation or any other changes within the business. For activity-based budget, a business will
base its forecasted expenses on an expected activity level. The activities which the business
carries out are used for this type of budget are thoroughly analyzed by the business to predict
the costs of the business. Each cost incurred is carefully analysed to determine if it can reduce
these costs and create efficiencies. Three advantages which arise from the use of activity
based budgeting are:

(i) Help identify inefficiencies

An Activity-based budget is prepared based on the activities of the business organisation.

Therefore, they are a sure means which can give a business better insight into any
inefficiencies within the processes of the business. This can help finance managers of the
business to find areas of improvement and make them more efficient. Bringing efficiency to
the processes of the business can also decrease its costs and increase profits in the long-term
thus increasing the value of the firm.

(ii) Are goal-oriented

Activity-based budgets are more goal-oriented as compared to the traditional budgets.
Activity-based budgets do not focus on stand-alone departments within a business but rather
focus on the business as a whole. As a result, this makes activity-based budgets much more
goal-oriented than the other types of budgets.

(iii) Avoid conflicts and enable business organisations to have a fresh start

Traditional budgets usually focus on the allocating resources to individual departments within
a business which may create within the managers of different departments. Activity based
budgets however avoid potential interdepartmental conflicts because they focus on the
activities of a business as a whole compared to focusing on individual departments.
Therefore, start-ups and businesses going through major changes may prefer to use activity-
based budgets to set a base budget for the future. However, it can also be used by businesses
that want to have a fresh start to their budgeting process. Activity-based budgets can provide
these businesses with a fresh start as they seek to re-invent their operations and provide a
strong base for future budgets based on it.

Suggest four reasons why advocate of a 'Beyond Budgeting' philosophy may not regard
a major annual budget preparation exercise as an effective use of resources. (10 marks)
In many operational organizations, the budgeting activity is considered to be a vital
instrument to implement companies’ strategies and to fulfil a wide range of further tasks
(Hansen et al., 2003). However, most business managers and finance managers have
expressed their dissatisfaction with the activity of budgeting. It is often criticized as being
responsible for causing budget gaming and being quickly outdated, time-consuming, costly
and inflexible. A viewpoint has emerged during recent years which challenges the traditional
approach to the budgeting process that has operated in both private and public sector
organisations since time immemorial. The most radical solution to overcoming these
disadvantages is a “beyond budgeting” approach. Advocates of a “Beyond Budgeting”
philosophy may not regard the traditional approach as the most effective way to undertake the
budgeting activity for the following reasons:

a) Traditional budgetary or control practice is not adequate to cope with the evolving and
changing market trends. In today’s business practices intangible assets, such as brand
 names and customer loyalty, are now key drivers of shareholder value, thus rendering
beyond budget philosophy to regard major budget preparation as an ineffective use of
resources as it emphasises on quantitative measurements in terms of cost control (Izhar,
and Hontoir, 2001).

b) Beyond budgeting philosophy is more adaptive process as compared to traditional

budgeting. Therefore, it regards major annual budget preparation exercise as a deterrent
to change thus constraining responsiveness and flexibility.

c) Major annual budget preparation exercise mainly focuses on cost reduction rather than
value creation. Therefore, “beyond budgeting philosophy” may regard it as not an
effective use of resources as it diverts focus from value creation which is of great
importance in maximisation of shareholders’ wealth which is goal of the firm. Beyond
budgeting philosophy argues that, it adds little value given time it takes to prepare hence,
it’s not an effective use of resources

d) In traditional budgeting exercise leaders plan and control organisations centrally thus,
strengthening vertical command and control. However, “beyond budgeting philosophy” is
a decentralised process. Therefore, major annual budget preparation exercise is regarded
as not an effective use of resources accruing to its rigidness which hinders responsiveness
to change.

REFERENCES
Bunce, P. (2004, July). The beyond budgeting journey towards adaptive management. A
report on the better budgeting forum from CIMA and ICAEW. CIMA(2007). Budgeting:
Traditional versus alternative. “Budgeting” section of Harvard Manage Mentor, the CPD
program for CIMA members.

Daum, J. H. (2002). Performance Management Beyond Budgeting: Why you should consider
it, How it works, and Who should contribute to make it happen. The new Economy Analyst
Report.

Hope, J., & Fraser, R. (2003). Beyond budgeting: How managers can break free from the
annual performance trap. Harvard Business School Press.

Horngren, T. D. (2003). Littlefield Professor of Accounting Emeritus, Stanford University.

USA, From www.scholink.org/ojs/index.php/mmse Modern Management Science &
Engineering Vol. 3, No. 1, 2015 74 Published by SCHOLINK INC. the First Annual Beyond
Budgeting Summit.

Izhar, R. and Hontoir, J. (2001). Accounting, Costing and Management, 2nd Edition, Oxford
University Press, UK.
Joyce, P.G. (1993). Using performance measures for federal budgeting: Proposals and
prospects. Public Budgeting & Finance.

Scarlett, B. (2007). Management Accounting-performance Evaluation. Journal of Financial

Management, 54. CIMA, Retrieved October 21, 2015, from http://www.bbrt.org/ Appendix
Appendix 1. Comparing Traditional and Beyond Budgeting Processes Purpose of
Performance management Traditional “Budgeting” processes Beyond Budgeting