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Thoughts on Budgeting ACCT7320 Fall 2011 Bailey

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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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slide1
Thoughts on Budgeting

ACCT7320Fall 2011 Bailey

purposes of budgeting
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?
purposes of budgeting3
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?
attitudes
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
research on participation
Research on “Participation”
  • Participation represents a spectrum
  • Studies show greater likelihood that managers will carry out their “own” plans, than imposed plans.
participation
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
effects are more complicated
Effects are more complicated

Participation

Improved group

cohesiveness

Prevailing Group Attitudes

Worse productivity?

Better productivity?

effectiveness
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)
forecasting of revenues costs
Forecasting of Revenues, Costs
  • Sales
    • The key figure!
    • Determines: production level

plant needs (expand?)

selling & admin expense

methods of sales forecasting
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
methods
Methods
  • 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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methods12
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)

methods13
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
budgeting continued
Budgeting, continued…
  • Discuss “Corporate Budgeting Is Broken”
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