Responsibility Centers Management Level Paper P 2 Advanced
Responsibility Centers Management Level – Paper P 2 Advanced Management Accounting Lecture - 11 Vidya Rajawasam ACMA CGMA MBA
Responsibility Centers In the previous lectures we have discussed § § Decentralization Cost , Profit & Investment centres Responsibility accounting Controllability of costs
Responsibility Centers In this lecture we will discuss § Behavioral aspects of budgeting § Behavioral aspects of budgetary control
Responsibility Centers Behavioral aspects of budgeting The employee participation in the budget setting process will support the following; § Increased motivation among employees § Improved quality of the budget decision making process § Improved efforts of individuals in achieving budgetary targets.
Responsibility Centers Behavioral aspects of budgeting In a divisionalized structure, there are two possible methods a budget can be set; § Top down (Imposed) budget method, The method does not allow the ultimate budget holder to have an opportunity to participate in the budgeting process.
Responsibility Centers Behavioral aspects of budgeting In a divisionalized structure, there are two possible methods a budget can be set; § Bottom up (participatory) budget method, Where the budget holders (Head of department/division) have the opportunity to participate in the budget setting system.
Responsibility Centers Imposed style budgeting system A top down (Imposed )budget is a budget that is set without allowing the ultimate budget holder to have the opportunity to participate in the budgeting process. The entire process of coming up with a budget will begin with upper-level management and an overall estimate of the entire company / project / operation.
Responsibility Centers Imposed style budgeting system Top-down budgeting works the opposite direction of bottom-up budgeting. Topdown budgeting begins by estimating the costs of higher level tasks, and then those estimates will constrain the estimates for costs of lower level tasks.
Responsibility Centers Imposed style budgeting system The overall budget is divided among the first upper level of tasks, and then the budget is further divided among the next lower level tasks and finally at the lowest levels of tasks. This process continues until funding has been allocated to all of the tasks necessary for a operation / project.
Responsibility Centers Imposed style budgeting system Finally, It is important that those managers who are in charge of determining the overall budget for a operation / project have enough experience that they will be able to come up with an adequate and accurate budget that will allocation of enough money to each level of tasks, yet will not ask for too much money.
Responsibility Centers Advantages of Imposed style There are several reasons for managers not to participate in the budget setting up process. § The process is time consuming and therefore, it is preferred to have the budgets imposed by senior managers. § The managers does not have skills or motivation to participate usefully in the budgeting process.
Responsibility Centers Advantages of Imposed style There are several reasons for managers not to participate in the budget setting up process. § The senior managers have better overall view of the company and it’s resources. Also, they are in a better position to create budgets which utilizes those scarce resources to the best effect.
Responsibility Centers Advantages of Imposed style § The senior managers are also aware of longer term strategic objectives of the organization and able to prepare a budgets which is line with the long term strategy. § Managers may build budgetary slack or bias into the budgets in order to make the budget process easy to achieve and also make themselves look good with the final results.
Responsibility Centers Advantages of Imposed style § Managers cannot use budget tactics or play games which disadvantage other budget holders. § By having the budgets imposed by senior managers, i. e. , someone outside the department, budgets will be more objective oriented and also bring fresher perspective in achieving gains through budget process.
Responsibility Centers Advantages of Imposed style § If the budgets are frequently and drastically changed by senior management, there is a possibility to cause dissatisfaction and de-motivation among the staff § Also if the management creates pseudoparticipation or fake participation impression with regard to budgeting process, the situation can create demotivation among employees.
Responsibility Centers Participative Budgets method. A bottom up or participative budget is a system of budgeting in which budget holders have the opportunity to participate in setting their own budgets. As a first step in preparing a bottom-up budgeting system, you begin by identifying all of the different tasks and steps that are involved in a particular operation / project.
Responsibility Centers Participative Budgets method. In order to determine the budget for the entire operation / project, the funding needed for each step is added together. To come up with a budget for the level above individual operations / projects, all of the operations / projects are added together. Once all levels of budgets are added together, you come up with a complete budget for the entire company.
Responsibility Centers Participative Budgets method. When determining costs related to the lower level tasks, it is usually done through a system of cost estimation. The estimates are made in terms of materials or man hours, then they must be converted to cash.
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Responsibility Centres Review MCQs The advantages of participative budgets are ? a. Increased motivation among employees. b. Better communication between stakeholders c. Reduction in head office bureaucratic controls d. Supports better pricing decisions
Responsibility Centres Review MCQs The advantages of participative budgets are ? a. Increased motivation among employees. b. Better communication between stakeholders c. Reduction in head office bureaucratic controls d. Supports better pricing decisions
Responsibility Centres Review MCQs The main two methods of budgeting systems are ? a. Revenue and costs budgets b. Imposed budgets and participative budgets. c. Operational budgets and project budgets. d. Non of the above.
Responsibility Centres Review MCQs The main two methods of budgeting systems are ? a. Revenue and costs budgets b. Imposed budgets and participative budgets. c. Operational budgets and project budgets. d. Non of the above.
Responsibility Centers The behavioral aspects of budgetary control A very important area related to budgetary control systems is the employee behaviour aspects. How employees operate and how they judge the budgetary systems is influenced by how the budgetary control systems are planned and implemented within an organization.
Responsibility Centers The behavioral aspects of budgetary control Recent research indicates that lower moral and reduction in motivation among employees results in due to control system outcomes. The scientific behavioral issues encountered in budgeting is indicated below.
Responsibility Centers The behavioral aspects of budgetary control Motivation & Co-operation A system to be fully effective, any system of financial controls should focus on providing incentives to motivate staff. If this requirement is not satisfied, the managers will approach their responsibilities in a very cautious and conservative manner.
Responsibility Centers The behavioral aspects of budgetary control Motivation & Co-operation Often adverse variances attract investigation but there is no incentive given for achieving favorable variances. Also, failure to distinguish controllable costs from uncontrollable costs in budgetary control can alienate managers from the whole process.
Responsibility Centers The behavioral aspects of budgetary control Motivation & Co-operation The success of the budgetary control system depends on people who operate and affected by it. Therefore, they must work within the system in an understanding and a co-operative manner.
Responsibility Centers The behavioral aspects of budgetary control Motivation & Co-operation A budget is simply used as a pressure device. If the budget is used as a ‘stick which beats people’, the process will be sabotaged in various subtle ways
Responsibility Centers The behavioral aspects of budgetary control Motivation & Co-operation The budgeting process and subsequent outcomes of the process generates competition among employees and departments within the organization. The managers may induce certain activities to in order to meet the budget targets, which may not in the best interest of the whole business.
Responsibility Centers The behavioral aspects of budgetary control Failure of goal congruence, An essential element of budgetary control is performance evaluation where actual results are compared with budgets or standards in order to determine the performance is good or bad. The process also evaluates the responsibilities of managers.
Responsibility Centers The behavioral aspects of budgetary control Failure of goal congruence, Therefore, the purpose of the budgetary control is to induce managers to behave in a manner that is to the best advantage of the organization. The compliance with the budget is enforced with a variety of negative and positive sanctions.
Responsibility Centers The behavioral aspects of budgetary control Failure of goal congruence, When adverse variances are reported, it highlights the poor performance of the manager. When managers are unable to correct or explain away the adverse variances, they may suffer negative sanctions.
Responsibility Centers The behavioral aspects of budgetary control Failure of goal congruence, The negative sanctions can be; • May have forgo salary increases, • May be demoted to a less prestigious post • Some other subtle negative sanctions These sanctions are well known for anyone who has ever worked in large organizations
Responsibility Centers The behavioral aspects of budgetary control Failure of goal congruence, Various Positive inducements may be offered to encourage managers to avoid adverse variances. For meeting the budgets he may be granted; § a performance-related salary bonus, promotion, § a new company car or use of the executive dining room.
Responsibility Centers The behavioral aspects of budgetary control Failure of goal congruence, Therefore, the manager has been given a considerable incentive to ensure that the department or operation he is responsible for achieving the budgeted level of performance. However, there can be situations where performing these activities may not provide advantages to the whole organization.
Responsibility Centers The behavioral aspects of budgetary control Failure of goal congruence, For example, a manager of a production line can reduce costs and improve its reported performances by reducing quality controls. This situation may result in long-term problems concerning failure of products in service, loss of customer goodwill and rectification costs.
Responsibility Centers The behavioral aspects of budgetary control Failure of goal congruence, Unfortunately, those activities are not the concerns of the production line manager. Therefore, this situation highlights a clear failure of goal congruence.
Responsibility Centers The behavioral aspects of budgetary control Failure of goal congruence, Therefore, it is important to understand that control systems and the managers who operate them are capable of distorting the process it is meant to serve or ‘ the tail wags the dog ’. The enforcement of a budgetary control system requires sensitivity, if things does not happen as planned.
Responsibility Centres Review MCQs The success of the budgetary purpose depends on ? a. Level of staff motivation b. External customer relationships. c. Incentives provided d. Non of the above
Responsibility Centres Review MCQs The success of the budgetary purpose depends on ? a. Level of staff motivation b. External customer relationships. c. Incentives provided d. Non of the above
Responsibility Centres Review MCQs The failure of goal congruence relates to ? a. The manager fails to understand work for firms goals and objectives. b. The employee receives no incentives c. The manager receives additional incentives. d. Non of the above
Responsibility Centres Review MCQs The failure of goal congruence relates to ? a. The manager fails to understand work for firms goals and objectives. b. The employee receives no incentives c. The manager receives additional incentives. d. Non of the above
Responsibility Centres Lecture Summary We have discussed the § Behavioral aspects of budgeting § Behavioral aspects of budgetary control
Responsibility Centers Management Level – Paper P 2 Advanced Management Accounting Lecture - 11 Vidya Rajawasam ACMA CGMA MBA
- Slides: 45