978-0077733773 Chapter 10 Cases Part 5

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Chapter 10 – Strategy and the Master Budget

Reading 10-3: “How Challenging Should Profit Budget Targets Be?

This article argues for using “highly achievable” budget targets, and explains six key advantages for

doing so, including the favorable effect on a manager’s commitment and confidence. The article also

explains some of the risks of using highly achievable budget targets. The concept of risk is illustrated

with probability distributions, with a relatively low-risk environment having a probability distribution

with lower variance.

Discussion Questions:

1. Explain each of the six advantages of highly achievable budget targets mentioned in the article.

Can you think of any in addition?

The article gives the following six advantages:

a. managers: commitment to achieve the budgeted target is increased

b. managers: confidence remains high.

Potential additional advantages include:

g. the harmful decision making effects of risk aversion are reduced (as explained in Chapters 3

2. What are the risks of highly achievable budget targets mentioned in the article? Can you think

of any in addition?

a. managers may not be challenged to perform at their maximum potential, if there are not

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Chapter 10 – Strategy and the Master Budget

Reading 10-4: A Closer Look at Rolling Budgets

Traditional budgets cover a fixed period of time, e.g., a one-year time frame. For this reason, these budgets

are sometimes referred to as “static” in nature. By contrast, some commentators suggest that some of the

negative consequences of this choice can be overcome with the use of rolling (continuous) budgets. This

article deals with issues related to the successful implementation of rolling budgets.

Discussion Questions:

1. What is the primary management-related issue addressed in this article?

As noted at the start of the article, more and more companies are using continuous or rolling budgets as

an integral part of the organization’s overall planning process. Such budgets maintain a constant (e.g.,

one-year) planning horizon: as each period (e.g., month) elapses, a new month is added to the budget. The

primary question addressed by the authors of this article is how such continuous budgets are best

2. What is the primary point of the “practical example” (“Static Budget versus Flexible Budgets”)

offered by the authors?

The example deals with the general issue of incentive effects, which constitute one primary consideration

in the design of an effective management accounting and control system. The case at hand involved a

salesperson whose initial sales goal was rather easily achievable. As such, this individual typically met the

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Chapter 10 – Strategy and the Master Budget

Reading 10-5: Budgeting: Perspectives from the Real World

This article survey evidence from senior accounting and finance managers regarding the budgeting

process at for-profit companies, including the usefulness and perceived value of the process, user

satisfaction with this process, and the impediments and challenges to budgeting. Respondents included

815 members of the Institute of Management Accountants (IMA). The study is a follow-up to a recent

study on budgeting published (2007) by Libby and Lindsay.

Discussion Questions:

1. What are the general accounting-related questions addressed by the authors of this paper?

The survey research project of these authors was designed to collect perceptions of accountants regarding

the budgeting process. Specifically, they were interested in obtaining information regarding the mechanics

of budget-preparation process (i.e., how they were prepared and how they were used for both planning

2. What were the primary survey findings regarding the budgeting process used currently in the

U.S.?

The majority of survey respondents indicated that a negotiated process (a combination of “top down” and

“bottom up”) characterized the budget-preparation process at their respective organizations. Further, 85%

of respondents stated that this process was the same throughout the entire company. These results are

roughly consistent across the two groups of respondents, corporate and segment.

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

monthly basis using both financial (primarily revenues and expenses) and nonfinancial measures

3. What did the authors find regarding the perceived value of the budgeting process (from the

standpoint of survey respondents)?

The survey administered by the researchers asked respondents for their opinions regarding the usefulness

of budgeting systems in relation to specific business objectives: strategic planning, resource/operational

Chapter 10 – Strategy and the Master Budget

planning, operational control, communication, coordination/teamwork across subunits, coordination/

teamwork across functional areas, motivation, and incentive rewards determination.

As noted in Table 1, Panel A of the article, the majority of respondents believe 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

The perceived usefulness of the budgeting process does not vary much based on whether respondents are

at the corporate or segment level.

4. What were the primary findings of this study as regards the level of satisfaction with the

budgeting process?

Respondents to the study (who were all accounting/finance personnel) also were asked to denote their

level of satisfaction with their organization’s budgeting system as it relates to a specified list of

management objectives. Satisfaction ratings for the full respondent sample are presented in Table 2,

Table 2, Panel B, shows that segment-level respondents 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.

In response to the question “Increasingly, the accounting/ finance function is being challenged to provide

value-added 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

The researchers also posed this question to respondents: “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

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Chapter 10 – Strategy and the Master Budget

5. As indicated in Chapter 10 of the text, there are potential negative behavioral consequences

associated with the budgeting process. What did respondents in this study say as regards this

issue?

Respondents to the survey 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.

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.

Figure 2 in the article 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.

6. What future research is suggested on the basis of this study?

The authors offer the following suggestions for extending their research project:

a) Survey operational managers (i.e., “users”) to determine the extent to which their views are consistent

with the views of finance/accounting personnel.

b) Examine the statistical relationship between budgeting practices and financial performance variables

(e.g., stock price or stock returns). Such a study could provide evidence as to the market’s perception of

different budgeting practices.

c) Obtain perceptions of managers (both preparers and users) from the not-for-profit sector, including

those from healthcare.

d) Because some level of dissatisfaction regarding the value added from the budgeting process was noted

by respondents to the authors’ survey, the authors suggest additional research to determine reasons for this

dissatisfaction, the context in which such dissatisfaction occurs, and recommendations for change/

improvement.

e) Finally, as noted in this article (and Chapter 10 of the text) there are some firms that have moved away

from the budgeting process as it is commonly construed. A study to determine conditions under which

such a move is tenable would contribute greatly to the profession’s knowledge of the budgeting process.

Reading 10-6: Turning Budgeting Pain into Budgeting Gain

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Chapter 10 – Strategy and the Master Budget

The author of this article is a career CFO and presents in the article survey evidence regarding the

budgeting process. The survey was conducted jointly by Centgage and the Institute of Management &

Administration (IOMA).

Discussion Questions:

1. On page 47 of the article, the author notes that “the budgeting process at most companies is

broken.” What evidence does the author offer in support of this statement?

The author relies principally on survey results obtained from a sample of CFOs. In general, the referenced

survey indicated lack of confidence in budget forecasts as a significant obstacle for budgeting systems;

the larger the company, the lower the confidence in forecasts (other than expenses). According to the

author of the article, this overall obstacle is traceable to the following three factors:

(1) People—that is, challenges associated with dealing with department managers (and, in some cases,

senior management) who provide input to budgets. Overall, this obstacle can be referred to as “buy-in and

involvement.”

2. What potentially positive roles does the author envision for properly constructed budgets?

Basically, the list of benefits proposed by the author of the article parallels the discussion in the text. That

is, the benefits of budgeting typically fall into one of the following two general categories: planning and

control. The following list of specific benefits is presented in the article:

a) cash-flow-management tool (particularly for smaller companies) (i.e., planning)

b) forecasting (and reforecasting) tool (i.e., planning)

3. What recommendations does the author offer for improving the budgeting process?

The author of this article offers a seven-step process for improving budgeting. Note: this would appear to be a rather

general process (set of steps) that could be applied to other organizational changes. Of particular importance are

behavioral considerations associated with successful changes/process improvements.

1) Critically evaluate the existing budgeting process

2) Upgrade technology (see question #1 above)

3) Communicate

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