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Thoughts on Budgeting ACCT7320 Fall 2011 Bailey

Thoughts on Budgeting ACCT7320 Fall 2011 Bailey. 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

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Thoughts on Budgeting ACCT7320 Fall 2011 Bailey

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  1. Thoughts on Budgeting ACCT7320Fall 2011 Bailey

  2. 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?

  3. 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?

  4. 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

  5. Research on “Participation” • Participation represents a spectrum • Studies show greater likelihood that managers will carry out their “own” plans, than imposed plans.

  6. 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

  7. Effects are more complicated Participation Improved group cohesiveness Prevailing Group Attitudes Worse productivity? Better productivity?

  8. 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)

  9. Forecasting of Revenues, Costs • Sales • The key figure! • Determines: production level plant needs (expand?) selling & admin expense

  10. Methods of sales forecasting • Judgmental estimates by key executives, sales force • Trend analysis a) “we've been growing 10% per year” b) Mathematical time series Sales example, Dept. store: Qtr • Sales = f(St-1,St-4) Details are complicated

  11. Methods • Correlation (regression) analysis (Not in time series. Just a correlation.) #Refrig. Sold = y x = # Housing starts in previous year y = a + bx . . . . . . . . . . . . . . . . . . . . . . .

  12. Methods • 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)

  13. Methods • 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

  14. Budgeting, continued… • Discuss “Corporate Budgeting Is Broken”

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