Finance Question 3

8/3/2019 Finance Question 3

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EVANS ESHUN 11531208

MANAGERIAL FINANCE FINAL ASSESSMENT

QUESTION 3

A. The budget is a critical planning tool for an organization. Whendeveloping a budget, it is important to be as concrete and specific as

possible about future income and expenditure. Performance budgeting

is a system of planning, budgeting and evaluation that emphasizes the

relationship between money budgeted and results expected. It focuses

on results and that is to say that departments are held accountable for

certain performance standards. They also have a long-term perspective

that is to say that they may run concurrently for years. A performance

budget reflects the input of resources and the output of services for

each unit of an organization. It also places priority on employees

commitment to produce positive results.

An effective budget serves as a powerful tool for the manager to use

during project implementation. The budget is used to plan all activities,

ensure all activities are relevant and necessary as well as the costing of

each activity. It is also serves as a means for the manager to evaluate

activities as well as staff performance.

To a large extent, the performance of a budget and it effect onorganizational growth and development is dependent on the goals and

objectives set by the organization. According to Locke (1968) as

mentioned by Boddy (2005), challenging goals lead to higher levels of

performance than simple or unchallenging goals. Difficult goals are

sometimes stretch goals because they encourage individuals to

challenge their abilities and efforts to the maximum level. Specific goals

lead to higher levels of performance than vague goals. Individuals find it

easier to adjust behaviour when they know exactly what the objective is

and what is expected of them.

Hofstede (1967) stated that tighter budget goals lead to higher

motivation, beyond a certain limit, however tightening budget goals

reduces motivation. According to the smart theory of goal setting, goals

should be specific, measurable, achievable, realistic and time-targeted.


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The attainability of budget goals has a significant impact on the

behaviour of employees who are required to achieve these goals. Easily

attainable budget goals will not trigger enough effort from the

employees and managers toward performance. On the other hand, if the

budget goals are too demanding, there are chances that the employeesand managers may resort to unscrupulous means to achieve the goals.

Budgets should therefore be challenging but attainable. Both ways

budgetary performance illustrates competence or inefficiency in

management.

B. A budget is a financial document used to project future incomeexpenses. The budgeting process may be carried out by individuals or by

companies to estimate whether the person or company can continue to

operate with its projected income and expenses. Most commercial

organizations make use of responsibility accounting. Responsibility

accounting within an organization identifies the person or department

responsible for a particular outcome. Managers are held to be

answerable for the performance against budget of the areas and

functions for which they are responsible.

According to Gowthorp (2009), there are two approaches to the budget

setting process. These are when the budget is imposed from above or

the participative approach where managers are involved in the budget

setting process at a detailed level. In spite of it less time consuming

nature, the imposition of budgets can create resentments if it is felt to

be unachievable or if it fails to take into consideration the real world

complexities that face middle management. Boddy (2005) suggests that

participation allows managers to take part in setting goals thus

increasing the level of commitment towards the achievement of the set

goals. Gowthorp (2008) further suggests that the inclusion of middle

managers in the budget setting process is necessary since they may be

aware of some constraints and limitations that are too minor to affect

the views of senior management but which may well be sufficiently

significant to impact on the budget at a departmental or divisional level.


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If middle managers and staff are invited to participate in the budget

setting process they are more likely to feel that they have ownership of

the budget and to work towards meeting it. Participation improves

communication between the budgeters and their superiors. This

increases the levels of motivation and aspiration of the budgeters andthus increases the probability that the budget will be accepted as a

legitimate target for which to aim thus enhancing the level of efficiency.

Irrespective of the above mentioned merits of the participative

approach, middle managers may be motivated principally by a desire to

keep their budget targets manageable especially if their bonus payments

are dependent on meeting targets. This problem may further grow into a

situation where managers may influence the budget standard by

creating a budget slack. There is a possibility that managers will bias the

information in order to gain the greatest possible benefit. This will apply

particularly in cases where the reward system places emphasis on

achieving the budget. A further problem is that participative processes

take time and the budget process may absorb too much managerial

attention at the expense of other activities.

The personality traits of the budgeters may limit the benefits of

participation. Individuals with certain personality traits may perform

better when budgets are imposed by a higher authority. Participation

may encourage managers to adopt a departmental self-centred

approach and concentrate solely on maximizing the benefits of their

own departments at the expense and benefit of the organisation as a

whole.

To be successful, a participative budgeting process must be genuine

especially in large bureaucratic organisations; the process is one of

pseudo-participation. Staff is apparently encouraged by senior managers

to participate in decisions about the budget, but the process is a sham;

all the real, important decisions will be taken at a senior level and thus

the participatory approach only becomes a facade. Pseudo-participation

fools no one and serves only to agonise staff.

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Finance Question 3