Introduction
Budgeting is an essential process for all businesses. By using the company’s current financial data as well as its historical data, a business should be able to forecast and plan a budget for the company’s future. A budget is defined as “a statement of monetary plans that is prepared in advance of a forthcoming period, usually one year” (Brookson 2000). This budget should align with the company’s strategic and operational plans and is the tactical implementation of the company’s business plan. Since the company’s budget is controlled by all levels of the company’s management, the company budget is usually an aggregate compilation of the departmental budgets. Budgets are used to help establish a company’s sales forecast, product pricing, as well as assist in investment planning. Budgets are also used by management for motivation and performance evaluation. A manager’s performance evaluation will usually relate to their contracted compensation plan and will be paid as a bonus in addition to their salary. These incentives are usually based on a percentage of meeting or exceeding budgeted or targeted goals which are established and controlled by management. Because of management’s control of the numbers, budgets and targeted goals are easily manipulated in order to increase the manager’s compensation. When this process occurs, it is known as “gaming” the system.
Gaming the System
Managers have been known to game the system when their personal incentives seem more attractive than the benefits of the organization. Gaming the system occurs when an organization’s explicit policies and procedures are being used which managers feel are obstacles in achieving the organization’s goals. “By flexing the...
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...reshold which in turn will benefit the company.
Works Cited
Brookson, Stephen. Essential Managers: Managing Budgets. New York: Dorling Kindersley Publishing, Inc., 2000.
Horvath, Peter and Ralf Sauter. "Why Budgeting Fails: One Management System Is Not Enough." Balanced Scorecard Report, 2004: 3-6.
Jensen, Michael C. "Corporate Budgeting is Broken - Let's Fix It." Harvard Business Review, 2001: 94-101.
Leone, Marie. "Rolling Budgets, with a Twist." CFO.com. June 3, 2003. http://www.cfo.com/article.cfm/3009422/1/c_2984786 (accessed March 17, 2010).
Rieley, James B. "Are Your Employees Gaming The System?" National Periodic Review, Summer 2000: 1-6.
Walker, Kenton B. and Eric N. Johnson. "The Effects of a Budget-Based Incentive Compensation Scheme on the Budgetary Behavior of Managers and Subordinates." Journal of Management Accounting Research, 1999: 1-28.
I attended the Saturday Lab 1 session discussing the Denison Specialty Hospital case study. In our session, we had a through discussion into the different budget terminology. I learned about the difference between accrual and cash accounting methods, which is based on the timing of when the revenue and expenses are recognized. I also learned about responsibility centers as an organizational unit under the supervision of a manager, who is responsible for its activities and results. In addition, the manager is accountable for the budget of the department that they head. Therefore, a centralized form of management in developing the budget because it makes easier to because the information for the department budget is located
[1] Noreen, Eric W., Brewer Peter C., et al., Managerial Accounting for Managers, Second Edition, McGraw-Hill/Irwin, New York, NY, 2011.
[5] Colin Drury, Management and Costing Accounting, (7th edition), Chapter 17, Standard costing and variance analysis, p. 425-436
McManus, Doyle. “Drawing Budget Battle Lines.” Editorial. Los Angeles Times. Los Angeles Times, 14 Apr. 2011. Web. 5 June 2011. .
UMUC, Ethics and SOX Powerpoints, references and notes presented by Professor George Petrello, for Summer 2011 The Economics of Management Decisions.
Several employees have witnessed varied offensive conduct by Mazey but have kept opinions to themselves until recently (Yemen & Clawson, 2007). Senior management at Hudson is aware of his behavior via 360o reviews; however, Mazey’s ability to produce revenue secured his promotion to vice president (Yemen & Clawson, 2007). Mazey acquiesces to upper management and believes employees of lower stature should do the same for him, while also accepting his unprofessional, degrading and condescending habits (Yemen & Clawson, 2007).
...d, stock manipulation, and having lower ranking workers’ jobs seen as meaningless, may not seem so appealing to those possessing empathy. However, success is being measured as monetary rewards for this review, and cold-hearted decision-making seems to be the culprit of raking in those rewards. How the psychopaths or the other employees in question feel about making decisions required to gain higher corporate status is just a mediator variable.
Budgets are the financial requirements and consequences of plans. Budgets are made with specific goals in mind. Budgets can be used to lower living expenses, increase savings, or to save for a purpose such as: education or retirement. Budgeting is a process that involves these actions: defining goals, gathering information, forming expectations, reconciling goals and data, monitoring goals and variances, adjusting budgets, and redefining goals.
Wildavsky, A., & Caiden, N. (2004). The new politics of the budgetary process (5th ed.). New York, NY: Pearson/Longman.
A company's budget serves as a guideline in planning and committing costs in order to meet tactical and strategic goals. Tactical goals such as providing budgetary costs for daily operations, and strategic objectives that include R&D, production, marketing, and distribution are all part of the budgeting process. Serving as a guideline rather than being set in stone, the budget is a snapshot of manager's "best thinking at the time it is prepared." (Marshall, 2003, p.496) The budget is a method in which to reign-in discretionary spending, and will likely show variances between what costs have been anticipated and what costs are actually incurred.
Participative Budgeting is the situation in which budgets are designed and set after input from subordinate managers, instead of merely being imposed. The idea behind this sort of budgeting is to assign responsibility to subordinate managers and place a form of personal ownership on the final budget. Nearly two decades of management accounting research has resulted in equivocal findings on the consequences and effects of participative budgeting (Lindquist 1995). Participative budgeting certainly has various advantages, these include the transferral of information from subordinate to superior increased job satisfaction for the subordinate, budgetary responsibility and goal congruence. Its disadvantages include budgetary slack and negative motivation, however it is the conditions in which participative budgeting takes place determines whether the budgeting process is successful. The conditions are dependent on various factors such as the level of participation, level of subordinate influence, the extent to which budgetary slack takes place, volatility, job related information, and the complexity of the budget.
Garrison, R. H., Noreen, E. W., & Brewer, P. c. (2010). Managerial Accounting. New York: McGraw Hill/Irwin.
During the year, budget performance was monitored closely. Each week’s and monthly, sales revenue performance figures were sent to Herb Stolzer by Roy Black. Roy Black also sent a monthly management report to Stolzer that included income statement highlights and a summary of key balance sheet figures and ratios. All information was provided with reference to (1) position last month (2) position this month (3) budgeted position.
Quantitative plans are called budgets. Budgets are prepared to impose cost controls on the activities of an organization (Chenhall, 1986).Budgets are then used to evaluate the performance of the management and budget itself is considered as a standard to evaluate the performance Solomon, 1956). The purpose of the budget is also to implement the strategy of the organization and communicate it to the employees of the organization Rickards (2006). The change in the external environment has led to the change in the budgeting approaches from the initial cash based budgets to the zerio based budgets (Bovaird, 2007).
Heisinger, K., & Hoyle, J. B.(2012). Accounting for Managers. Creative Commons by-nc-sa 3.0. Retrieved from: https://open.umn.edu/opentextbooks/BookDetail.aspx?bookId=137