Behavioural Issues in Budgeting

To The headland Executive From trouble Accountant Date 19th January, 2012 To The Chief Executive From Management Accountant Date 19th January, 2012 Behavioural issues which may ready the usefulness of figureing Management Accounting Behavioural issues which may unsex the usefulness of computeing Management Accounting The university of northampton By Matthew Matemba 10347139 The university of northampton By Matthew Matemba 10347139 Table of coiffure 1Part A2 1. 1Executive Summary2 1. undercoat2 1. 3Definition2 2Purposes of reckon2 3 work outary Biasing Framework3 3. 1Budget quagmire (Bias)4 3. 2Seat of Power4 3. 3Budget Gaming4 3. 4Gatekeepers5 3. 5 beat the System5 3. 6The know-it-all5 4Effects of Budgeting unaffixed (Bias)5 5Causes of Budget Slack6 6Conclusion6 7Part B8 7. 1 exchange Budget8 7. 2Interpretaion of hard currency Budget9 8References9 9Bibliography11 10Appendices12 Part A Executive Summary This report demonstrates conductal issues which may limi t the usefulness of budgeting in Langdale Ltd.Including in the report argon origin, definition, characters and types of budgeting. introductory to the above, the report certifys different form of budgeting padding causes of budgeting slack , researches and above all(a) the control of aforementioned behaviours in organisations and three months cash budget for Duncan Distilleries plc. Background According to Dugdale and Lyne, the emergence of Scientific Management in the 1920s, standard be and public orbit budgeting was established by the study of business sector organisations (2010, P. xi).Quickly, this development became budgetary control with a budget designed to comp ar estimated proviso with true result of performance in aid to identify each variance either favourable or adverse. Keuning (1997) suggested that, budgeting is associated with higher managers assigning travail to different departments. Definition Chartered Institute of Management Accountants (CIMA) in the U K defines a budget as A plan expressed in money. It is ready and approved prior to the budget period and may level income, expending and peachy to be employed. May be drawn up presentation incremental do on former budgeted or ctual figures or be compiled by Zero-based budgeting (Hannagan, 2008, p. 560). There are various types of budgets namely, Zero- piece, Incremental, Rolling and Activity Based budget. Purposes of Budget The purposes of budget are planning of annual carrying into actions, co-ordinating the activities of various split of the organisation, communicating plans to the various responsible centre managers, motivating managers to strive to progress to the organisation goals by meeting set targets. Finally, controlling activities and evaluating the performance of managers.Undoubtedly, budget plays major part in managing organisations because norms are set to compare budgeted and actual performances financially. However, research has showed that with new realiti es of global competition, rapid change and modern engineering the Beyond Budgeting movement has criticized the traditional budgeting that, it was not meeting the advance challenges in terms of technology. Therefore, Bunce and Fraser formed the Beyond Budgeting Round Table in the UK in 1998 and inspired by the Swedish bank, Svenska Handelsbanken (Michael, 2007).Contrary to main purpose of budgeting individuals actions demonstrates some behavioural issue which may limit the usefulness of budgeting and this powerfulness not different from employees of Langdale Ltd. The diagram 1 beneath illustrates the relationship between objectives of budgeting contrary to behavioural issues of employees. Budgetary Biasing Framework pram (2004) Budget Slack (Bias) As illustrated above, personal goals are a behaviour which may limit the usefulness of budgeting. It is a deliberate over-estimating of expenditure and/or under-estimate of revenues when setting budget in order to achieve easy targets.Th ese actions from managers lower the ability of management to control variances. Research has revealed that, the inclusion of budget Slack or Padding is common in various companies. For example, Dugdale & Lyne (2010 cited in Onsi 1973 p. 26) found that 80% of managers interviewed were preparing to admit they bargained for Slack. Though, budget slack are seen as pitiable and dysfunctional, there are some indications that some slack can be desirable providing some flexibility to operating managers Dugdale & Lyne (2010).This is known as manipulating of figures. However, reports show that due to complex inter-relationships between the various departments degree of manipulating of budgeting is difficult. Contemporary literary works has reinforced the idea that slack can be desirable as well as dysfunctional. For example, Nohria and Gulati (1996) noted that slack could act as a buffer that was necessary for organisation adaptation Tan, J. and Peng, M. W. (2003) See Appendix B. Dugdale & Lyne (2010 cited in Van der Stede 2002 p. 6) found that slack could facilitate strategy in business units pursuing differentiation in much(prenominal) circumstance ends up with plain assets such as plant, equipment and buildings. Seat of Power Additionally, from diagram 1 shows a power factor which is another behavioural issue which is a confinement to budgeting. This affects budgeting process when individual managers have influence over the outcome of proposed jacket expenditure. Consequently, this could divert the company direction which is contrary to its corporate objectives. cognitive operation touchstone therefore, should establish to encourage the aim of the company and not individual or departmental goal. (Hannagan, 2008, p. 569) Budget Gaming Moreover, another limitation of useful budgeting is budget gaming which is an attempt by managers to practice bias in advance. A study shows managers as well as tend to game the budget after it has been implement by making accou nting entries to portray their operation in a light that are driven by desire to report cleanse result. Hopwood in his study showed that such behaviour is more likely if managers are evaluated Hopwood (1972) See Appendix C.For example, monetary value centre managers attempted to charge items of woo to other cost centres and tended to time the expenditure in light of their effects on the short-term variance but such manipulation was on tap(predicate) to congenatorly few people. Gatekeepers These are employees in high position who decelerate in passing on vital informations to heads of departments. much(prenominal) personnel have authority to regulate the flow of information also in a position to determine various levels of management decisions. Beating the SystemIndividuals or groups may be able to beat the corpse and they are even proud of behaving in such a manner. For example, a company set a budget of ? 15,000 for capital equipment. Above this limit supererogatory authori ty is required before any extra cost are incurred. However, the managers beating the system simply acquire a mold at a cost of ? 18,000 by ordering the capital equipment one by one for instance, ? 14,000 and ? 4,000 per machine respectively. Surprisingly this behaviour happens in the real world and competent internal control system and audit controls are called for further investigation. The Know-AllThere are certain managers who think they will take decisions without consulting their subordinates not realising that, the said capital equipment will only work with certain additional equipment. In one case, although the subordinates were not consulted, yet they knew the know-all manager was buying a fixed asset they remained silent knowing this machine might need additional parts to operate. Eventually, there was a problem and the subordinates were very(prenominal) pleased when things went wrong. To conclude, this highlights the importance of participation and meeting to discuss o n capital investment in non-current assets. Hannagan, 2008, p. 569). Effects of Budgeting Slack (Bias) Budgeting slack creates an environment where budgeting goals are not met or exceeded. Employees therefore fail to maximise sales and minimising cost and actually rather providing incentives to overspending as managers fear losing money in later(prenominal) years and above all, budget slack encourage waste. Causes of Budget Slack The problem of budget slacks is inevitable when the previous years budgeting is used as a basis for preparing the current budget as shown on diagram 1. This approach is known as Incremental Budgeting cosmos used by Langdale Ltd.Though, provisions are made for inflation, increased activities and comfortably to use and understand by managers and above all less costly to operate, incremental budgets have some draw-backs such as not considering operation priorities, not objective orientated hence tameing to manipulation of budget figures and encourages Spe nd it or Lose mentality. Consequently, BPP (2005, p. 303) has recommended that, to eliminate budget slack, the alternative budget to adopt is Zero-Based budgeting. Nevertheless, zero-based budgeting is mostly use in services companies such as Governmental organisations and non-governmental organisations.Conclusion Debatably, Langdale Ltd being a publishing company, an alternative budgeting to alter incremental budgeting is Activity-based budgeting (ABB). ABB is contemporary approach to financial planning. It establishes the relationship between cost and activities. Resources are allocated to each activity which provides in-depth details especially regarding overheads because ABB permits the identification of adding a value to activities and the cost drivers of such operations. It minimising the utilisation of resources by focusing on how to increase productivity.Furthermore, ABB will provide the company opportunity of focusing on why you need to undertake certain activities, how of ten to perform them and their relative cost. Certainly, this approach of budgeting will enhance on processing information and products of uneconomic activities that may reduce and re-deploy the companys resources for potential alternatives. Finally, in manufacturing sector being the scope of Langdale Ltd ABB can enable the company to quantify decisions as follows * Reduction in Set-up and machine repairs. * Facilitates detailed analysis of cost consequently, lead to avoid certain cost.Part B Cash Budget Duncan Distilleries Plc. Cash Budget for July to September 2011. July August September ? 000 ? 000 ? 000 Sales (50% IN 30 Days) Note 6 clxxx 180 375 (50% in 60 Days) 180 345 345 trust Loan Given 100 100 Total inflows 360 625 820 Outflows touch on cost Note 1. 1 32 32 32 genuine 194 312 349 Variable cost Note 2. 1 208 233 235 Fixed marketing and dissemination Note 3. 3 3 3 3 Variable Selling and dispersion Note 3. 1 14 15 18 constitution Given 18 18 18 Finance cost Bank interest Note 4 - 1 2 Financing Costs ( quittance) 0 0 0 Total Outflows 469 614 657 Net Cashflow -109 11 163 open Balance 25 -84 -73 Closing Balance -84 -73 90 Interpretaion of Cash Budget The cash budget alerts Duncans management the company run into deficit in July and August. Although, the cash inflow in September will show surplus yet the financial position of the company is not immobile since the first repayment of ? 50,000 loan will be due in 1st October. As a result, management has to negotiate with their bankers to extend the repayment to November. The company could also use different method of sales such as online in order to reduce variable selling and distribution cost. Finally, since the cost of material is quiet high, management could ask for more whippy terms of payment to their suppliers in percentage terms Scarlett (2009). References BPP Learning Media, 2007. profit math ematical process Management. 1st ed. capital of the United Kingdom BPP Learning Media Ltd. BPP, 2005.Management Accounting Performance military rating. 2nd ed. London BPP Professional Education. Dugdale,D. & Lyne, S. , 2010. Budgeting Practice and make-up structure, Oxford s. n. Hannagan, T. , 2008. Management fancy & Practices. In 5, ed. Management Concept & Practices. Harlow. Essex Pearson Education Limited, p. 560. Hopwood, A. , 1972. An falsifiable Study of the business office of Accounting Data in Performance Evaluation. Online, vol. 10, pp. 156-182. functional from http/www. jstor. org/stable/248970 Accessed 10 celestial latitude 2011. Keuning, D. , 1997.Management A Contemporary Approach. London Pitman Publishing. Michael, A. , 2007. Beyound Budgeting. Online . available from www. cimaglobal. com Accessed 10 November 2011. Tan, J. & Peng, M. , 2003. The Role of Organizational Slack Theory and Evidence. Online, vol. 24, pp. 1251-1252. Available from http//www. utdallas. edu Accessed 10 December 2011. Walker, J. , 2004. Home. Online . Available from http//maaw. info/ArticleSummaries/ArtSumWalkerJohnson99. htm Accessed 27 November 2011. Walther, L. , n. d. Home. Online. Available from http//www. rinciplesofaccounting. com/chapter21/chapter21. html Accessed 26 November 2011. Bibliography BPP Learning Media, 2007. Advance Performance Management. 1st ed. London BPP Learning Media Ltd. BPP, 2005. Management Accounting Performance Evaluation. 2nd ed. London BPP Professional Education. Dugdale , D. & Lyne, S. , 2010. Budgeting Practice and Organisation structure, Oxford s. n. Hannagan, T. , 2008. Management Concept & Practices. In 5, ed. Management Concept & Practices. Harlow. Essex Pearson Education Limited, p. 560. Hopwood, A. , 1972.An data-based Study of the Role of Accounting Data in Performance Evaluation. Online Available from http/www. jstor. org/stable/248970 Accessed 10 December 2011. Keuning, D. , 1997. Management A Contemporary Approach. Lon don Pitman Publishing. MAAW, 2004. Home. Online Available from http//maaw. info/ArticleSummaries/ArtSumVanderStede2000. htm Accessed 27 November 2011. Michael, A. , 2007. Beyound Budgeting. Online Available from www. cimaglobal. com Accessed 10 November 2011. Scarlett, R. , 2009. Performance Operations. Oxford Cima Publishing. Tan, J. & Peng, M. , 2003.The Role of Organizational Slack Theory and Evidence. Online Available from http//www. utdallas. edu Accessed 10 December 2011. Walker, J. , 2004. Home. Online Available from http//maaw. info/ArticleSummaries/ArtSumWalkerJohnson99. htm Accessed 27 November 2011. Walther, L. , n. d. Home. Online Available from http//www. principlesofaccounting. com/chapter21/chapter21. html Accessed 26 November 2011. Appendices A. Calculations Cash Budget B. Journal The Role of Organization Slack C. Journal An Empirical Study of the Role of Accounting Data in Performance Evaluation