CH-11

Making budgets
work

By Sergelen.T

C-181
1. Behavioral implications of budgeting

Budgetary control system- to help management to plan & control resources by

providing appropriate control information.

Motivate
Demotivate

– Goal congruence- Goal of management/employees = Goals of the whole organization

– Dysfunctional decision making- Managers/employees take decision, promoting the self interest
Poor attitudes

– When managers involved in – When a budget is implemented

preparing budget

Only meeting targets, not trying to

Complain ‘being busy’ beat targets

Build ‘slack’ Short-term > Long-term consequences

3. Participation and performance evaluation

Top-down (Imposed)
+ Enhance co-ordination between
plans & objectives of division
+ Less time on draw up the budgets
-Feeling of team spirit may disappear
-Day-to-day managers could have a
better understanding of what is
achievable
Participation

Bottom-up (Participative)

+Morale and motivation is improved

+More realistic
-More time needed
-Budgetary slack/budgetary bias
-Not qualified managers-unachievable
managers
Negotiated budget

“Budget in which budget allowances

are set largely on the basis of
negotiations between budget holders
and those to whom they report”
Features of feedback

– Clear and comprehensive

– Exception principle
– Controllable costs and revenues
– Timely
– Accurate
– Communicated to the right person
3 ways of using budgetary information to
evaluate managerial performance
Hopwood
1. Budget constrained- performance is measured on ability to meet budget
2. Profit conscious- focuses on increasing effectiveness of a unit’s operation
3. Non-accounting- on non-financial (feedback from colleagues)
3. Using budgets as targets

– Ideal standard
Demotivating
– Low standard of efficiency
– Budget level of attainment (normal)

– Expectations budget= budget for planning & decision-making based on

reasonable expectations
– Aspirations budget= for motivational purposes, with more difficult
targets of performance
4. Management accountant &
motivation
– Profit sharing scheme= scheme in which employees receive a certain proportion
of their company’s year-end profits
+ Only pay what it can afford out of actual profits
+ Bonus can be only paid to non-production personnel
- Employees must wait until wait until the year end
- Uncontrollable factors may affect profit
- Too many employees
SHARE OPTION SCHEME- gives its members the right to buy shares in the company
for which they work at a set date in the future and at a price usually determined
when the scheme is set up.
EMPLOYEE SHARE OWNERSHIP PLAN- acquires shares on behalf of a number of
employees and must distribute these shares within a certain number of years of
acquisition.
- Benefits are not certain
- Benefits are not immediate
Value added=Sales- Cost of brought-in materials & services
Value added incentive scheme-affected only by costs incurred internally.
Thank you for your
attention

Good luck