Purposes of Budgeting
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Transcript Purposes of Budgeting
Thoughts on Budgeting
ACCT7320 Fall 2011 Bailey
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Purposes of Budgeting
Stimulate concern for the future
Provide a framework for delegation of
authority & responsibility
A financial model to test plans against
A communication device
- to relay top management’s style & authority
- establish organizational climate
- the dialogue is what’s important
Motivation?
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Purposes of Budgeting
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?
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Attitudes
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
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Research on “Participation”
Participation represents a spectrum
open process of
group decision making
Consultation only;
centralized decision making
Studies show greater likelihood that managers will carry out
their “own” plans, than imposed plans.
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Participation
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
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Effects are more complicated
Participation
Improved group
cohesiveness
Prevailing Group Attitudes
Worse productivity?
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Better productivity?
Effectiveness
Additionally, the effectiveness of participation may depend
upon:
Nationality
Ethnical attitudes
Personality types of workers, supervisors
Access to information (centralized, dispersed)
Type of decision (e.g., close down plant)
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Forecasting of Revenues, Costs
Sales
The key figure!
Determines: production level
plant needs (expand?)
selling & admin expense
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Methods of sales forecasting
Judgmental estimates by key executives, sales force
2. Trend analysis
a) “we've been growing 10% per year”
b) Mathematical time series
Sales example, Dept. store:
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Sales = f(St-1,St-4)
Qtr
Details are complicated
Methods
3.
Correlation (regression) analysis (Not in time series.
Just
a
correlation.)
.
#Refrig.
Sold = y
.
.
.. . . . .. .
... . . .
.
. .. . .
x = # Housing starts in previous year
y = a + bx
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Methods
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4.
Multiple regression
y = a + b1x1 + b2x2 + b3x3 etc.
E.g.,
y = tire sales by Uniroyal
x1 = new cars to be manufactured
x2 = new cars made 3 years ago
x3 = GNP (or DPI)
Methods
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
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Budgeting, continued…
Discuss “Corporate Budgeting Is Broken”
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