Managerial Accounting Garrison Noreen Brewer- Chapter 8 – Flashcards

Budgets communicate management's plans throughout the organization. Budgets force managers to think about and plan for the future. In the absence of the necessity to prepare a budget, many managers would spend all of their time dealing with day-to-day emergencies. The budgeting process provides a means of allocating resources to those parts of the organization where they can be used most effectively. The budgeting process can uncover potential bottlenecks before they occur. Budgets coordinate the activities of the entire organization by integrating the plans of its various parts. Budgeting helps to ensure that everyone in the organization is pulling in the same direction. Budgets define goals and objectives that can serve as benchmarks for evaluating subsequent performance.

The basic idea underlying responsibility accounting is that a manager should be held responsible for those items—and only those items—that the manager can Page 364actually control to a significant extent.

Continuous or perpetual budgets are sometimes used. A continuous or perpetual budget is a 12-month budget that rolls forward one month (or quarter) as the current month (or quarter) is completed. In other words, one month (or quarter) is added to the end of the budget as each month (or quarter) comes to a close. This approach keeps managers focused at least one year ahead so that they do not become too narrowly focused on short-term results.

In fact, many managers believe that being empowered to create their own self-imposed budgets is the most effective method of budget preparation. A self-imposed budget or participative budget is a budget that is prepared with the full cooperation and participation of managers at all levels.

Individuals at all levels of the organization are recognized as members of the team whose views and judgments are valued by top management. Budget estimates prepared by front-line managers are often more accurate and reliable than estimates prepared by top managers who have less intimate knowledge of markets and day-to-day operations. Motivation is generally higher when individuals participate in setting their own goals than when the goals are imposed from above. Self-imposed budgets create commitment.

Unfortunately, many companies do not use self-imposed budgeting. Instead, top managers often initiate the budgeting process by issuing profit targets. Lower-level managers are directed to prepare budgets that meet those targets. The difficulty is that the targets set by top managers may be unrealistically high or may allow too much slack. If the targets are too high and employees know they are unrealistic, motivation will suffer. If the targets allow too much slack, waste will occur. Unfortunately, top managers often are not in a position to know whether the targets are appropriate. Admittedly, a self-imposed budgeting system may lack sufficient strategic direction and lower-level managers may be tempted to build slack into their budgets. Nevertheless, because of the motivational advantages of self-imposed budgets, top managers should be cautious about imposing inflexible targets from above.

The success of a budget program also depends on whether top management uses the budget to pressure or blame employees. Using budgets to blame employees breeds hostility, tension, and mistrust rather than cooperation and productivity. Unfortunately, the budget is too often used as a pressure device and excessive emphasis is placed on "meeting the budget" under all circumstances. Rather than being used as a weapon, the budget should be used as a positive instrument to assist in establishing goals, measuring operating results, and isolating areas that need attention.