Transcript Budgeting Lecture, and Jensen article discussion PPt

Thoughts on Budgeting
ACCT7320 Fall 2013 Bailey
6-1
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?
6-2
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?
 “Stretch” budgets a good idea?
 Should there be separate budgets for motivation vs. planning? Or a range of
budgets with different levels of probability?
6-3
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
6-4
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.
6-5
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)
6-8
Forecasting of Revenues, Costs
 Sales
 The key figure!
 Determines: production level
plant needs (expand?)
selling & admin expense
6-9
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:
1.

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
6-11
Methods
6-12
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
6-13
Budgeting, continued…
 Discuss “Corporate Budgeting Is Broken”
6-14
Kinks
p. 97
6-15
Linear!
P.98
6-16