Question

One of the behavioral considerations associated with the budgeting process relates to the difficulty level embodied in the budget (i.e., how difficult or easy it is to achieve budgeted results).

Required:

1. Explain the negative consequences of budgetary targets that are too easy or too difficult to achieve.
2. What is meant by the term "highly achievable (budget) target"?
3. What are the primary advantages of using "highly achievable targets" in terms of budgetary expectations?
4. Discuss some major differences between static and flexible budgets.

Answer 1

Answer for a)

Negative consequences of too easy targets:

1) Managers and the employees performance efficiency can be decreased as the targets are easily achievable.

2) The company may see decline in revenue as the employees will get their incentives anyway.

3) I no minimum limit exist the employees may relax after achieving their targets which may lead to loss of market share of the organisation

Negative consequences of too difficult targets:

1) Employee performance may decline due to lack of motivation.

2) May result in lack of confidence in employees

3) May result in high employee rotation due to lack of work satisfaction in employees.

Answer for b)

Highly achvable targets:

Highly achievable targets are targets which are on softer side to achieve and which are most likely to be achieved within time frame.

Answer for c)

Advantages of highly achievable targets:

1) It develops confidence and motivation to the employees .

2) It may increase attention in employees as such targets are reasonble to achieve but not too easy to achieve.

3) Managers tend to be more serious as the targets may be prestige issue to the managers.

4) Coordination among employees may increase in order to achieve such targets.

Answer for d)

Difference between Flexible and static budget:

1) Flexible budget may be changed during management planning stage which is not in case of static budget.

2) In real world scenario, flexible budget may be more practical as it can be changed based on assumption. However static budgets are not that easy practical as it remains constant no matter what.

3) Static budget is considered to be less complex to prepare as compared to flexible budget as it won't change once prepared.