Question

According to your textbook, “A budget can have a significant impact on human behaviour…Participative budgeting can foster budgetary “gaming”… a budget can be a manager’s friend or foe”.

Required:

Critically evaluate the issues raised in the above excerpt.

b) Return on Investment (ROI) is commonly used to measure divisional performance and awards bonuses to divisional management based on their division’s performance.

1. Describe two examples on how a manager can improve his/her division’s ROI, but which may harm the future competitiveness of the company.

1. As a management accountant, criticize how the use of ROI as a performance measure for investment centers can lead to bad decision making. Suggest what steps can be taken to mitigate this effect.

Answer 1

The use of some form of return on investment (ROI) as a management control device in evaluating the profit performance of division managers has been widely adopted in many decentralized companies. Yet the evidence shows that this control system has serious limitations, which result from the inability to use ROI to make correct evaluations. The author notes that any criticism of the use of ROI is met with the response, “I agree it is not perfect, but it is the best system available.” This, he says, is the crux of the problem. He believes there are better systems available and offers specific actions that should improve the management control system of any company using ROI measurement.

Inherent ROI Limitations

Despite the fact that some adaptation of ROI is a widely used tool in management control in the United States, I feel that a strong case can be made against it because the ROI system has certain inherent limitations in it. For purposes of this discussion, I find it useful to separate these limitations into two types: “technical” and “implementation.” The first type are those conditions which cause incongruities between divisional objectives and company goals, and which result in motivating division managers to take uneconomic actions. The second type includes those conditions that result from the inability, under many circumstances, to evaluate accurately the profit performance of division managers. Let us look more closely at each of these limitations

Rev up your ROI by recognizing distractions and executing differently. Here are five tips to help your business thrive:

1. Plan for ROI

Value exists in quantifying the expected outcomes from marketing investments. Learn what to measure, when to measure and how to measure. In order to achieve your goals, establish specific steps to move the process along.

2. Avoid Vanity Metrics

Keep away from metrics that distract your team from the business goal. Typical marketing metrics like Facebook fans and press release shares may impress folks, but often don’t correlate to revenue.

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3. Sales, Sales & More Sales

The Information Age has produced a new type of consumer—an informed buyer. People now make purchases based on blogs, reviews, and social networks. The good news for your business is that you have access to the same information. The bad news: your team doesn’t know how to translate that data into revenue.

4. Experiment Frequently

Experimentation offers opportunities for your business to accelerate its growth. Testing should not only offer insight but also alternatives. Furthermore, it doesn’t have to be a cumbersome process; simple business experiments work well.

Try the test-and-learn approach. Take one action with one targeted group, take a different action (or no action) with a control group, and then compare the results. This method keeps the process simple, and outcomes become apparent without the hassle.

5. Make A Decision Without Regret

Reporting your marketing analytics is necessary for your business’s success. More importantly, your team should focus on making an informed decision from those reports. So, what’s stopping management from taking action? They may have a case of analysis paralysis.

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