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Thoughts on Budgeting ACCT7320 Fall 2011 Bailey

Purposes of Budgeting

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Stimulate concern for the futureProvide a framework for delegation of

authority & responsibilityA financial model to test plans againstA communication device

- to relay top management’s style & authority- establish organizational climate- the dialogue is what’s important

Motivation?

Purposes of Budgeting

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These purposes may conflict. E.g., the best motivator may not be the best expected performance for planning cash flow, etc.

Target shown on budget ? Expected attained performance

So, should there be separate budgets for motivation vs. planning? Or a range of budgets with different levels of probability?

Attitudes

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Attitudes toward budgets tend to be negative.

Chris Argyris, The Impact of Budgets on People, 1952

Neg. attitudes towards accountants and budgets

Recommended participation in the budgeting process as a cure; generally supported by later research

Research on “Participation”

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Participation represents a spectrum

Studies show greater likelihood that managers will carry out their “own” plans, than imposed plans.

open process of

group decision making

Consultation only; centralized decision

making

Participation

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But care is needed in generalizing from the research studies

E.g., Some studies involved a change from authoritarianism to some participation - May not generalize to a change from some to much participation

Current research approach is to consider the underlying processes & conditions

Effects are more complicated

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Participation

Improved groupcohesiveness

Better productivity?Worse productivity?

Prevailing Group Attitudes

Effectiveness

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Additionally, the effectiveness of participation may depend upon:

NationalityEthnical attitudesPersonality types of workers, supervisorsAccess to information (centralized, dispersed)Type of decision (e.g., close down plant)

Forecasting of Revenues, Costs

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Sales The key figure!

Determines: production level plant needs (expand?) selling & admin

expense

Methods of sales forecasting

1. Judgmental estimates by key executives, sales force

2. Trend analysisa) “we've been growing 10% per year”

b) Mathematical time seriesSales example, Dept. store:

Qtr Sales = f(St-1,St-4) Details are

complicated

Methods

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3. Correlation (regression) analysis (Not in time series.

Just a correlation.)

#Refrig. Sold = y

x = # Housing starts in previous yeary = a + bx

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... .

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.. .

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Methods

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4. Multiple regression

y = a + b1x1 + b2x2 + b3x3 etc.

E.g., y = tire sales by Uniroyalx1 = new cars to be manufactured

x2 = new cars made 3 years ago

x3 = GNP (or DPI)

Methods

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5. Market share analysis(co's % of mkt) x (total industry forecast)

E.g.: pharmaceutical firm has 20% of market;

all legitimate drug sales = 1% of DPI 20% x 1% x DPI forecast = our sales

forecast

Budgeting, continued…

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Discuss “Corporate Budgeting Is Broken”