In: Accounting
The HR manager of your organisation is worried about the amount of resources and time consumed by the budget committee annually. He believes the whole process is a waste of time and that departments should be allowed to set their budgets. But you also reckon that a budget is based on the policies needed to fulfil the objectives of the entity i.e. it is a plan consisting of objectives and what to do to achieve these objectives.
As an account officer in the finance department, the head of finance has asked you to address the fears of the HR manager in a memo. Identify and explain at least four budgetary design issues and discuss the questions that these issues raise. Give solutions that may be adopted in practice. Also, analyse the pros and cons of for his proposal i.e to allow departments set their own budgets.
Budget affects the approach and behaviour of managers and used to motivate the managers. unrealistic demanding targets tend to affects managers performance adversely. Allowing managers to set their own targets will introduce SLACK targets. managers working in an environment where they are expected to meet the budget targets often try to introduce slack into budget, but where there is more relaxed attitude, or when other factors are considered alongside the analysis of variances, managers are general less inclined to introduce slack. But it can have a detrimental impact on the evaluation of actual performance if manager incorporate slack into the budget in order to make it easier to achieve.
Identification and explanation of Budgetary design issues are :
The solution or improvements that may be adopted in practice are as follows:
Pros and cons of deciding the budgets by departments:
Pros:
Internal rivalry between managers will be reduced as it will shift to competitors.
It eliminates some behavioural issues.
It helps in motivating individuals by defining clear responsibility and challenges.
It establishes customer oriented teams.
Cons:
It will increase the administational and research cost of each department.
It may lead to more time wastage in preparing budgets and variance Evaluations.
It can have a detrimental impact on the evaluation of actual performance if manager incorporate slack into the budget in order to make it easier to achieve.