Fluent Essays

****500 words, use USA based examples and try to reference something from the attachment. Budgeting is an important part of an organization’s overall planning. Through budgeting, each part of an organization’s structure can be identified for decision making and control. For example, if the budget shows that one million units are to be sold in the next 3 months, the sales department knows that it must achieve that goal. At the end of the first month, the sales department can determine by looking at the budget if it is on track or not and what decisions it must make to meet the goal. A reasonable budget can allow an organization to allocate resources and provide a plan and direction for the organization. A budget can also help measure performance and ensure that managers are held accountable for their decisions.To prepare for this Discussion, “Shared Practice: Evaluating the Budgeting Process,” take a moment to think about your organization or an organization you are familiar with. Consider the importance of the budgeting process, forecasting, and strategic planning for informing how the organization operates with regard to decision making.Post the following:Provide an evaluation of how forecasting, strategic planning, and budgeting processes impact your organization.Provide 2–3 examples from your professional experience in your current or former organization, or from your interview, to support your position. Be sure to include specific budgeting tools used by the organization.Identify the key stakeholders in the budgeting process at the organization and explain how they are involved in the processes.Explain how knowledge of forecasting, strategic planning, and budgeting processes might impact your decisions in the organization you currently work for or one that you will work for in the future. budgeting_perspectives_from_t.pdf Unformatted Attachment Preview Budgeting: Perspectives from the Real World B Y K A R E N S H A S T R I , P H . D . , C PA , A AND D AV I D E . S T O U T, P H . D . SURVEY OF SENIOR ACCOUNTING AND FINANCE MANAGERS EXAMINES THE BUDGETING PROCESS AT FOR-PROFIT COMPANIES, INCLUDING THE USEFULNESS AND PERCEIVED VALUE OF THE PROCESS, USERS’ SATISFACTION WITH IT, AND THE IMPEDIMENTS AND CHALLENGES TO BUDGETING. of the major criticisms of the budgeting process. We conducted a follow-up survey to the Libby and Lindsay study with the goal of providing answers to some more-detailed questions: ◆ How are budgets in modern (for-profit) organizations prepared? That is, what are the descriptive characteristics of the budgeting process as used today? ◆ Does budgeting add value for organizations? If so, how? ◆ How satisfied are finance and accounting managers regarding the role that budgets play within an organization? ◆ What are the primary behavioral consequences, both positive and negative, of using budgets? ◆ What is the relationship, if any, between budgets and other management processes—i.e., are they integrated in any meaningful sense? he value of the budgeting process has been the subject of intense debate over the past few years. In their 2003 book, Beyond Budgeting, Jeremy Hope and Robin Fraser suggest that the traditional budgeting process is outdated and dysfunctional and, therefore, should be abandoned.1 Alternatively, a 2007 survey by Theresa Libby and R. Murray Lindsay offers evidence that senior accounting and finance managers find the budgeting process to be more helpful than harmful overall and that there is a perception that operating managers could not function well without budgets.2 The Libby and Lindsay study provides answers to some important, but general, questions regarding the budgeting process, including whether accounting and finance managers’ organizations planned to abandon budgeting and whether respondents agreed with some T M A N A G E M E N T A C C O U N T I N G Q U A R T E R LY 18 FALL 2008, VOL. 10, NO. 1 ations. These results are roughly consistent across the two groups of respondents, corporate and segment. In terms of planning, 69.5\% of respondents indicated that the primary planning tool continues to be the static budget, defined as a budget valid for only one planned volume level of activity for the upcoming budget period. By definition, the static budget provides scant opportunity to adapt quickly, so it is interesting to learn that the majority of respondents continue to use the static budget given the available options for planning purposes, such as continuous or rolling budgets, flexible budgets, and zero-based budgets (ZBB). Regarding feedback/control purposes, most respondents compare actual results to budgeted results on a monthy basis using both financial (primarily revenues and expenses) and nonfinancial measures (primarily customer satisfaction and market share). Moreover, 78\% of respondents reported that managerial compensation plans, including incentive compensation formulas, incorporate achievement of specified budget objectives for financial performance measures, while 62.7\% reported the same for nonfinancial measures. All of these results are generally consistent between corporate- and segment-level respondents. THE SURVEY In November 2007, questionnaires were sent via e-mail to 29,501 members of the Institute of Management Accountants (IMA®) who, based on job title, were likely involved in the budgeting process. These members included general management, corporate management, public accounting, general accounting, cost accounting, and environmental accounting staff members. Participants were asked to respond to questions based on their position in the organization (i.e., “company-level” or “segment-level,” where “segment” was defined variously as a subsidiary, division, department, or product line). A total of 815 members completed the survey. Because the focus of our study was for-profit entities, as with the Libby and Lindsay study, we excluded responses from managers at nonprofit or governmental entities. This resulted in a final sample of 720 respondents who worked at publicly traded corporations (52.5\%), privately held corporations (42.4\%), and partnerships (5.1\%), mostly in the United States. Approximately 48\% of respondents work at the corporate level, with the remainder at the segment level. The highest percentage of respondents was in manufacuturing (28.1\%), followed by healthcare (9.9\%). In regards to company size, the largest percentage of respondents (35.7\%) reported company revenues between $1 billion and $50 billion and segment revenues between $50 million and $500 million (34\%). The largest group responding to our survey was controllers (25.5\%). On average, our respondents had 13 years of budgeting experience. THE USEFULNESS VA L U E OF The next part of the survey asked respondents for their opinions regarding the usefulness of budgeting systems in relation to specific business objectives: strategic planning, resource/operational planning, operational control, communication, coordination/teamwork across subunits, coordination/teamwork across functional areas, motivation, and incentive rewards determination. This list of objectives parallels what we traditionally teach in managerial and cost accounting courses. As noted in Table 1, Panel A, the majority of respondents believes that the budget is either “useful” or “very useful” as it relates to the list of business objectives. In a traditional management accounting setting, the budget was considered to be important for planning and control purposes only. The fact that these preparers indicated that it is also useful for other functions such as strategic planning, communication, and incentive rewards suggests that there may be a forward-looking Descriptive Characteristics of the Budgeting Process The initial part of the survey instrument asked for descriptive information regarding the budgeting process at the respondent’s organization. Specifically, we wanted to know how budgets were developed and how they were used for planning and control purposes. According to 69.2\% of respondents, the development of the budget is accomplished via a negotiated process (a combination of “top down” and “bottom up”). Further, 85\% of respondents stated that this process was the same throughout the entire company, with exceptions due to merger/acquisition activity or international oper- M A N A G E M E N T A C C O U N T I N G Q U A R T E R LY AND B U D G E T I N G SYS T E M S 19 FALL 2008, VOL. 10, NO. 1 Table 1: Perceived Usefulness of the Budget Panel A: Aggregate Results Business Objectives Strategic Planning1 Very Useful/ Useful Somewhat Useful Not Very Useful/Not Useful Don’t Know/No Opinion N 60.0\% 24.4\% 10.5\% 5.1\% 488 Resource/Operational Planning2 73.5\% 18.7\% 3.9\% 3.9\% 487 Control3 84.3\% 10.1\% 4.1\% 1.4\% 485 69.9\% 19.0\% 8.7\% 2.5\% 485 Operational Communication4 Coordination/Teamwork across Subunits5 51.4\% 21.6\% 21.4\% 5.6\% 486 Coordination/Teamwork across Functional Areas6 53.3\% 23.5\% 19.1\% 4.1\% 486 Motivation7 58.8\% 24.0\% 14.1\% 3.1\% 483 Incentive Rewards Determination8 68.1\% 14.9\% 11.8\% 5.2\% 483 Panel B: Corporate and Segment Subgroups Very Useful/Useful Corporate Segment Responses Responses Business Objectives Strategic Planning 50.7\% 54.5\% Resource/Operational Planning 76.1\% 73.0\% Operational Control 86.1\% 85.5\% Communication 69.1\% 70.5\% Coordination/Teamwork across Subunits 52.8\% 49.4\% Coordination/Teamwork across Functional Areas 53.3\% 54.5\% Motivation 56.6\% 56.9\% Incentive Rewards Determination 70.1\% 67.9\% NOTES: 1 2 3 4 5 6 7 8 To support strategic initiatives specified by top management. To estimate resources required for forecasted operations or to anticipate financing needs. To ensure that actual results are consistent with planned results; to provide feedback/assessment regarding operating activities. To provide a road map for employees to deliver output/services as expected by management; to communicate how individual units of the organization contribute to the overall strategy. To encourage teamwork across business segments (divisions, product lines, etc.). To encourage teamwork across business functions (finance, marketing, systems, etc.). To encourage employees to put forth effort in terms of stated goals and objectives of the organization. To determine bonuses or other benefits based on comparison of actual vs. budget. tional areas (19.1\%), motivation (14.1\%), and incentive rewards determination (11.8\%). As such, these areas represent fruitful topics for additional research or critical examination into the reasoning behind these perceptions. The perceived usefulness of the budgeting process does not vary much based on whether respondents are at the corporate or segment level. One difference, as seen in Table 1, Panel B, is that segment-level respondents movement from relying solely on the annual numbers as a planning and control mechanism to a perception that the budget can be part of the strategic management process of an organization. While many respondents indicated the budget is useful for all of the listed objectives, there were some for which more than 10\% of respondents indicated that the budget process is either “not very useful” or “not at all useful”: coordination across subunits (21.4\%) and func- M A N A G E M E N T A C C O U N T I N G Q U A R T E R LY 20 FALL 2008, VOL. 10, NO. 1 Table 2: Respondent Satisfaction with the Budgeting Process Panel A: Aggregate Results Satisfied/ Very Satisfied Neutral Dissatisfied/ Very Dissatisfied Not Applicable N Strategic Planning Resource/Operational Planning 49.2\% 27.7\% 21.6\% 1.5\% 459 55.8\% 24.1\% 17.9\% 2.2\% 457 Operational Control 64.9\% 18.3\% 15.9\% 0.9\% 459 Communication 49.5\% 27.1\% 21.9\% 1.5\% 457 Coordination/Teamwork across Subunits 35.5\% 33.6\% 27.2\% 3.7\% 459 Coordination/Teamwork across Functional Areas 41.8\% 31.9\% 24.6\% 1.8\% 455 Motivation 43.0\% 32.1\% 24.0\% 0.9\% 458 Determination of Incentive Rewards 45.7\% 26.3\% 22.8\% 5.3\% 457 Business Objectives Panel B: Corporate and Segment Subgroups Satisfied/Very Satisfied Corporate Segment Responses Responses Business Objectives Strategic Planning 43.1\% 44.2\% Resource/Operational Planning 53.5\% 52.5\% Operational Control 59.2\% 62.8\% Communication 41.1\% 45.8\% Coordination/Teamwork across Subunits 28.5\% 32.2\% Coordination/Teamwork across Functional Areas 37.8\% 40.2\% Motivation 33.8\% 38.0\% Determination of Incentive Rewards 41.1\% 44.0\% the one objective (or benefit) of budgeting where individuals are most satisfied. This finding is not surprising given that operational control is one of the classic purposes for preparing and using budgets. One other observation from Table 2, Panel A, is that more than 10\% of respondents are not satisfied with the budgeting process. This disparity between the usefulness of budgeting in general compared to increased dissatisfaction within a specific organizational context suggests that some of the respondents feel that the budgeting process within their respective organization is not optimal and possibly does not produce the kind of results they feel are possible. Table 2, Panel B, shows that segment-level respon- perceive the budget to be more useful as it relates to strategic planning, yet corporate-level respondents indicate greater usefulness in terms of resource/operational planning. Corporate-level respondents also perceive the budget to be more useful for coordinating across subunits as well as a tool for incentive rewards determination. Respondents also were asked to denote their level of satisfaction with their organization’s budgeting system as it relates to the list of management objectives. Satisfaction ratings for the full respondent sample are presented in Table 2, Panel A. More than 40\% of the respondents are largely satisfied with the budgeting process except in relation to coordination/teamwork across business units. Operational control was cited as M A N A G E M E N T A C C O U N T I N G Q U A R T E R LY 21 FALL 2008, VOL. 10, NO. 1 Table 3: Impediments/Challenges Associated with the Budgeting Process ● Unrealistic goals set for the budget ● Problems linking the budget with the strategic plan ● Lack of accountability by some managers ● Lack of buy-in by nonaccounting managers ● Amount of “fluff” built into the budgets ostensibly because of the reward system ● Tendency of some managers to shirk their responsibilities in terms of budget preparation ● Changes in product mix during the budget period ● Changing costs during the budget period ● Accuracy of budget estimates ● Revenue planning is inadequate ● Lack of resources in terms of time, staff, and a system to create the budget ● Initial budget time is too time-consuming ● Rework cycle time is too time-consuming ● Inability to correctly prioritize for planning ● The politics and culture of the firm ● Silo attitude adopted throughout the firm ● Lack of communication and information sharing across firm ● Diverse management and geography ● Reorganizations that create budgeting conflicts ● Constraints due to economic changes, market conditions, or the regulatory environment dents are relatively more satisfied with the budgeting process than are corporate-level respondents, with one exception: Corporate respondents are more satisfied with the budget as it relates to resource and operational planning. The difference for this attribute, however, does not appear to be substantial. It is no secret that the accounting/finance function today is being challenged to provide greater valueadded services to the organization. Consequently, we asked accounting/finance managers about the value that was added to the organization as a result of their respective budgeting process: “Increasingly, the accounting/ finance function is being challenged to provide valueadded services to management. How would you rate your budgetary process in terms of adding value to your organization?” Forty percent of respondents feel that the budgeting process meets this overall goal.3 At the same time, approximately 23\% of respondents believe that the budgeting process adds relatively little value to the organization. This result is being driven more M A N A G E M E N T A C C O U N T I N G Q U A R T E R LY by the segment accountants—29\% of them held this view. The difference between these results and the usefulness and satisfaction ratings reported in Tables 1 and 2 are somewhat puzzling. One possible explanation is that respondents were applying a cost-benefit test when judging “value added.” Another possibility—and possible limitation of the study—is that the term “value added” may mean different things to different respondents. A clue to resolving the inconsistency in results is provided by the open-ended responses to the question: “What impediments/challenges exist that affect the ability of an organization’s budgetary process to add value to the firm?” Responses lend support to concerns being raised by critics of budgeting and simultaneously suggest strategies for improving the budgeting process. While some of our survey respondents indicated there were no problems associated with the budgeting process at their organization, a number of common concerns were identified. They are summarized in Table 3. In particular, challenges and impediments focus on 22 FALL 2008, VOL. 10, NO. 1 unrealistic goals, management accountability, lack of or constrained resources, and the political climate surrounding the firm. cern is the perception that the budgeting process encourages a myopic planning horizon. Clearly, this sentiment suggests that some organizations need to pay greater attention to linking budgeting to strategy. In terms of the breakdown between corporate- vs. segment-level respondents, segment-level respondents indicated a stronger sentiment with the issues presented in Figure 1. Compared to corporate-level respondents, more segment-level managers either agreed or strongly agreed that the budget: ◆ Blocks employee initiatives, ◆ Pressures managers to make decisions with a short-term focus, ◆ Inhibits management response to change, ◆ Pressures employees to achieve targets, ◆ Inappropriately rewards those skilled in the negotiating process, and ◆ Encourages a myopic planning horizon. In fact, almost twice as many segment-level employees than corporate-level employees felt that budgets had negative behavioral consequences in terms of employee initiatives, motivating short-term decision B E H AV I O R A L C O N S E Q U E N C E S OF BUDGETING We also sought practitioner perceptions regarding the behavioral consequences (both positive and negative) associated with the use of budgets. A listing of putative negative behavioral effects (e.g., “budgets pressure employees to achieve results”) and summary response data from the sample is provided in Figure 1. Respondents largely believe that budgets do not: ◆ Block employee initiatives, ◆ Unduly pressure managers to make decisions with a short-term focus, ◆ Inhibit management responses to change, ◆ Unnecessarily pressure employees to achieve targets, or ◆ Inappropriately reward those skilled in the negotiating process. One attribute where the responses might be of con70.0\% 60.0\% 50.0\% Figure 1: Negative Behavioral Consequences of Budgeting Figure 1 Negative Consequences of 40.0\% 70.0\% 30.0\% Strongly Disagree/Disagree Neutral 60.0\% 20.0\% Agree/Strongly Agree 50.0\% 10.0\% 40.0\% 0.0\% 30.0\% 20.0\% 10.0\% Support continuous Provide managers Lead to information improvement with information to and knowledge respond to change sharing across subunits Encourage appropriate risk taking 0.0\% Block employee initiatives Pressure managers Inhibit managers to Pressure employees to take short-term respond to to achieve targets actions changing events M A N A G E M E N T A C C O U N T I N G Q U A R T E R LY 23 Reward those skilled in negotiating the budget FALL 2008, VOL. 10, NO. 1 Encourage myopic planning horizon making, and pressure to achieve targets. Figure 2 presents perceived positive behavioral effects of budgeting. There was general agreement among respondents that budgets can be used to support continuous improvement, to provide managers with information they need to respond to change, to motivate information and knowledge sharing across subunits, and to encourage appropriate risk taking. For either the “agree” or “strongly agree” responses, a lower percentage of segment managers (details not reported here) indicated that budgets can be used to support continuous improvement and motivate information and knowledge sharing across subunits. These subgroup results, combined with the subgroup results associated with Figure 1, suggest that there is more support for the budgeting process as a value-added proposition at the corporate level compared to the seg70.0\% ment level. R E L AT I O N S H I P BETWEEN BUDGETING AND OT H E R M A N AG E M E N T P R AC T I C E S A budget that is a part of a firm’s strategic planning process would likely be integrated with other management practices. To explore these relationships, we asked respondents whether their company (or subunit, as appropriate) used any of the following: activity-based costing (ABC), target costing, supply-chain management, or the balanced scorecard (BSC). Respondents were also asked if those individual practices, if employed, were integrated into the budgeting process. The most frequently used practices were supplychain management and the balanced scorecard, both of which are linked to the budgeting process when used. Ap ... Purchase answer to see full attachment