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Accounting and Managment - Research Paper Example

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You don't need a survey to tell you that finance executives don't like budgeting, but what the research does show is just how much. Making a budget is an exercise in minimalisation…
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Accounting and Managment
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Download file to see previous pages Coombs & Jenkins (2002)
Costly: For a better idea of the real cost of budget preparation, consider a company where 160 employees devote time to some aspect of budgeting. At an average cost of approximately $105,000 per employee, the company s annual cost of budgeting is nearly $17 million. Van der Stede (2003)
Are irrelevant to today's environment: Budgets are developed and updated too infrequently. In today's turbulent business environment, the budgeted numbers could change daily and, as a result, the budget would be out of date before the financial year has even begun. (Barr, p38)
Inflexible: Budgets are too reactive and inflexible and are a barrier to change. There are very few companies that actually update their budget during the fiscal year, purely because it is too complex and time consuming. Management and governments also spend very little time each month working on strategy, as most time is spent on data collection, reconciliation and accountability for public funds. Niskanen (1971)
Internally focused: Jeremy Hope and Robin Fraser (2003) argue that budgets focus on cost reduction and not value creation. Budgets focus on internally generated targets that are comfortably achievable by you, but appears difficult to your superior. This breeds sub-optimalisation and does not promote growth of shareholder value.
Production oriented: According to Stefan Sering and Maria Goldbach (2002), the traditional budget was developed in the manufacturing era where production costs and revenues were predictable, whereas today, an event such as 9/11 can change the way you do business at the drop of a hat.
Concentrate on numbers: In the form of incrementalism-where the previous year's appropriation is the starting point for budget formulation, with negotiations focused on increments or decrements, state budgets. It is quite evident that while making budgets, the emphasis is on numbers and cost cutting. Aaron Wildavsky (2001).
Does not include non financial information: The budget structure does not reflect changes in the company's organization and processes, and people were budgeting many costs largely under someone else's control. Hope and Fraser (2003) argue that front line managers are unable to regulate their own performance and financial planning processes. And therefore individual behaviours are not better aligned with corporate strategy.
They don't reduce costs but protect them. This comes from the age old "use it or lose it" mentality. Staff knows that if they don't use a budgeted expense, it will get pulled from the next year's budget as management sees it as unnecessary especially in the public sector. Any unused balances are cut from the next annual budget. Brimson, Antos and Collins (1999).
They encourage managers to play games with it. Budgets can encourage 'gaming' and perverse behaviour. Finance managers are more than familiar with "managing the slack" and making the budget "presentable" to the board. This, however, creates a culture of dishonesty and can lead to greater troubles such as fraud. Jensen (2001)
They are results oriented. According to Hansen and Mowen (2006), when budgets are resource driven rather than output driven, then managers concentrate on resources and may fail to see the link between resources and output. When the need arises for cost cutting they make cuts on ...Download file to see next pagesRead More
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