Why Budgetary Performance Should Be Reasonably Attainable but Not Too Easy to Meet - Term Paper Example

RUNNING HEAD: Budgeting Budgeting of Problems Introduction This paper seeks to explain why the following assumptions may be made by accountants when designing a system of budgeting, and to set out in each any arguments about legitimate clouds about their validity: (a) Budgetary performance should be reasonably attainable but not too easy to meet; (b) Participation by managers in the budget-setting process leads to better performance; (c) A manager’s budget reports should exclude all matters which are not completely under their control; and, (d) The budget statement should include only matters which, can be easily and accurately measured in monetary terms. 2.1. Budgetary performance should be reasonably attainable but not too easy to meet. Making it too easy will not make a difference whether managers would have to exert effort. There is no difference to have a good or bad manager and the subordinates may take their work not seriously as they would feel that there is no risk to whatever they are doing now in their jobs. This would bridge second-rate performance as there is difference with something desirable. Complacency would be expected as result as well. On the other hand, making it too difficult may discourage managers from attaining the same. The need for budgetary performance to be reasonably attainable but not too easy to meet is a psychological matter which follows the expectancy theory. Said expectancy theory can be described as way to a manager’s behavior to be motivated to do something. Have the manager feel that what would set to accomplish is realistic and this would have him functioning. But to require him to promise the moon and stars would against the principle of expectancy theory. Thus it required that managers should be part in the budget planning process so they can voice their concerns on the attainability of objectives. Every person’ a motivation do things in reaching an objective would be easier to confirm if said person believes in the value of the goal and that the chance to reach that goal is realistic. Complying with the requirement of expectancy theory would allow employee or manager to put value on the outcome of his or efforts and believes that reaching the same outcome is attainable or probable. The expectancy theory reduced into an equation: Force = valence x expectancy (Koontz & Weihrich, 2006) is confirms the need to have goals that are not too difficult to attain in order to motivate people. The force referred in the said equation is equivalent to the strength of employee’s or manager’s motivation with the valence equated with the strength of same manager’s preference for an outcome. On the other hand, the expectancy in the equation is probability that a certain event would bring an expected outcome (Koontz & Weihrich, 2006). Approving attainable budgets that are not necessarily very easy and not too difficult would tantamount to reducing the need for managers to engage in data manipulation as they try to hit the target. No manager may want to appear not meeting the target. This would also create a positive attitude among managers since rather than causing them to change the facts to change the result of their performance due to very high degree of attainability a challenging atmosphere is more preferred. Where managers are able to meet and exceed their targets, they would feel their sense of confidence that they could be trusted and they are well functioning. Being competitive is an attitude that is expected of manager and challenging them to compete is the proper way towards the right direction (Dutta, n.d.). 2.2 Participation by managers in the budget-setting process leads to better performance. Participation by manager in the budgeting-setting process would allow these managers to have commitment in the goals that would be set. By so doing they could necessary have a say on the attainability of objectives and their non-objection in said meetings could mean their implied agreement. This would therefore require them to participate in the process and the necessary or implied agreement on the implementation of plans would normally come as result. Allowing individuals to participate in the setting of the performance targets and he or she could more likely to accept the targets and he would be more committed to achieve them (Drury, 2006). Involving the manager in the target-setting process is akin to getting their cooperation before setting them to deliver what should be expected. To allow participation also increase the openness of communication which is also needed in the organization of people involving the use of resources. The effect of this second advantage would be to reduce the information asymmetry gap that would help some sat in the likely setting of standards which are essentially imposed because of the need to meet measurable objectives (Drury, 2006). Moreover, the chance that subordinates would be given more information from the manager about the relationship between outputs and inputs would be better. This process of information sharing would make it easier to have effective targets set. Another possible reality that must be realized that should necessitate participation is demotivation and alienation that could result if standards are imposed rather than discussed and negotiated partly (Drury, 2006). To require participation still puts in the shoulder of the higher top management to finally have the targets set without necessarily imposing them on lower managers. Failure to allow participation can trigger or bring about instead negative attitudes and the consequence could be in the failure to meeting organizational objectives (Drury, 2006) To follow what a CEO may want is without participation from lower managers is to argue for an authoritative style of management. Virtually ordering the subordinates including the managers without consultation from the latter, to do some work implies denying decision-making skills and trust on the lower mangers. Of course managers may apparently agree but they would be doing otherwise because in the first place they were not consulted. They were thought or considered as objects to follow orders. They could be thought as if they are machines that could be used whenever top management may want to use them without considering their feeling and sense of creatively contributing to the attainment of the organizational objectives (Pearson, 1999; Plunkett and Attner, 1985). Of course they are people or managers who can readily follow orders. These managers who would almost obey everything may be better suggested to be placed in the military service since they have the unwritten attitude that they should obey first before they complain. Business organizations however is not military organization since every decision made in the latter would essentially be decision involving opportunity cost for the business and error in making judgements may result to wasting resources. But human are not dogs or animals that can be dictated. Humans have complex processes that would require the use of freedom and controllability of the results in order to inspire them. 2.3. A manager’s budget reports should exclude all matters which are not completely under his or her control. The essence of demanding or responsibility for performance is controllability by the manager of the factors he could influence. One is bound if one is free or has freedom the influence the outcome of the variables. A manager’s budget reports to should as much as possible should generally exclude all matters which are not completely under his or her control in order to have responsibility for what he reports. Said budget reports of the manager would of course refer about costs, revenues, and resources that would allow comparisons between actual performance and budget expectations (Needles, et al 2010.) The responsibility for performance can be determined by having the comparisons. The budget expectations of course would be those that relate to organizational objectives from which previous commitment and concurrence from the managers have been previously made. The comparisons would most logically suggest performing above or below objectives and explanations could be made the manager. If there appears seeming underperformance the manager must be able to explain why such things happen. If it would come out that those factors are controllable then the manager would he held accountable. Thus the statement that all non-controllable matter should be excluded in the reports may be a problem for the manager since it may happen that his under or over-performance may actually be external to him or things beyond his or her control but may convince his or her superior that the manager is just working under given parameters which must be considered. To illustrate, a manager may report only his meeting or not meeting his revenue targets. If information on the economic variable is excluded in the report, the same would result to depriving the manager to taking into account economic variable that is external to him. The manager could not have faulted to meet his 20% increase in revenues if previous assumption on GDP growth was 10% and yet the economy actually had a recession. However such exceptional reporting non-controllable factors should only be used to explain non-occurrence of previous assumptions made. On the other hand, having performance report that includes uncontrollable items by the manager is to put the credibility of the entire responsibility accounting into question. Top management should rather be able structure and construe the performance results impartially if managers would report only on controllable matters (Needles, et al, 2010). Budgeting can enable management control by its capacity to allow demand for accountability for results from the managers. First have projected level of operations (Atkinson, et al, 2005; Bernstein, 1993), participated by managers. The said level of operations would normally be prepared along the projected cash budget, projected income statement and balance sheet as basis for the projected cash flows. This would be basically be putting controllable figures in the minds of managers who help in their realization but factors that could cause their attainment cannot exclude macroeconomic variable from changing the assumptions earlier made. Thus, reports by managers should still include assumptions of factors which may not necessarily be controllable by them (Massie, 1987). 2. 4. The budget statement should include only matters which, can be easily and accurately measured in monetary terms. Budgeting is about control and accountability. Measurability becomes therefore a necessary part of budgeting which can be best attained in monetary terms. A budget can be described as a comprehensive plan for all the activities and operations of an organization for a given years. It should be considered therefore to cover the organization as a whole and only some sections of the organization. It was conceived or made precisely to help in meeting organization financial and non-financial objectives. Since every organization has financial objectives, one cannot avoid talking about monetary terms. Thus the budget statement should include generally matters which, can be easily and accurately measured in monetary terms. To exclude any non-financial matter may sound good but the same may be unrealistic. Making a simple illustration would clear the need to allow an exception. Projected revenues cannot be absolutely claimed to be easily accurately measure in monetary terms on the ground that revenue is a function of price and quantity. Although these two are measurable ultimately in monetary terms, the same could not be meant to exclude the required quality of product or service that is associated with its quantity. Such quality need not be measured in monetary terms since they are considered as part of the non-financial measure that the business must take into consideration. The quality level needed for each product or service is directly tied up with certain level of customer satisfaction (Kotler, 1994) which may not be property excluded in budget statement. Of course the budget statement may just be listing the product level and corresponding price of each type of product. Knowledge or information how on non-financial matters which can be added as footnotes or additional information in understanding the budget statement may be justified on case to case basis. Of course having an accurate measurement is desirable but the same cannot be done for practical purposes all the time (Edwards and Bell, 1961). For the simple reason that nobody can completely forecast what will happen in the future (), the budget statement should allow to assumptions to be stated and some assumptions cannot be necessarily measured in monetary terms. It must be admitted that the need to express things in monetary terms if compelling requirement because of the need to control performance. To attain the latter objective, managers should be necessarily allotted the power over which activities and they could control if their responsibility for performance should be capable of evaluated. To allow the latter there should be measurement in manner that will be reliable and in consonance with of the overall company objectives. 3. Conclusion That budgetary performance should be reasonably attainable but not too easy to meet was found valid and consistent with human experience. That participation by managers in the budget-setting process leads to better performance is generally applicable in organizations. However, the last to statements evaluated were found expressed in absolute terms and therefore exceptions should be allowed. Thus, a manager’s budget reports should generally exclude all matters which are not completely under their control. In addition, the budget statement should generally include only matters which, can be easily and accurately measured in monetary terms. Each of the statements analysed has each logical basis in the human experience and would be beneficial to organizations if followed. However since in every rule there is an exception, such exceptional cases must be carefully considered in order not to harm the organizations or prevent the same from actually attaining their objectives. Hence, this paper has asserted the general applicability of the statement while allowing exception under certain circumstances for the last two statements. References: Atkinson, Anthony, et al (2005). Management Accounting. New Jersey: Person Custom Publishing Bernstein, J. (1993). 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