Question

Both the budget process and budgets themselves can impact maangement actions, both poitively and hegatively. For instance, a common practie amoung not-for -profit organizations and governemnt agencies is for management to speand any amoutns remaining in a budget at the end of the budget period, a practie often called "use it or lose it". The view is that if a department manager does not spend the budget amount, top management will reduce next year's budget by the amount not spent. To avoid losing budget dollars, department mangers often spend all budgeted amounts regardless of the value added to products or services. All of us pay for the costs associated with this budget system through higher costs or increase taxes.

Discuss this practice and what you would do if your were department manager faced with this issue. If you were asked to recommend a solution to this practice what would you suggest?

Answer 1

It is true that the Budget Process and Budget themselves impacts management actions since that is the base to take decisions on higher level.

It is commonly observed that If Budget not used in full, company may rebase the budget for such specific department using the decreased amount of budget anywhere.

Question states that: To avoid losing budget dollars, Department Manger often spend all budgeted amounts regardless of the value added to products or services. This practice is not good since unnecessary costs are passed onto the Final Customer.

Solution:

This Practice can be dealt positively by Manager and Organization. Departmental Manager can show the savings from the budget allocated by not incurring the non-value added cost. But at the same point of time, Managers should be motivated well to report the savings to Management. In that case, company should incentivize the managers who reports material saving to keep them motivated towards saving.

Usually, Company makes future projection for next 5 years. Budget given by department managers should be reviewed well so that diversions from this budget in future can be tracked directly and non-value adding expense can be identified.