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STRATEGIC MANAGEMENT ACCOUNTING

Budgeting

Six important reasons for budgeting:Planning the use of resources, in view of market opportunities.Systematic forecasting.Controlling business activities.Motivating individuals to achieve agreed performance levels.Communicating wishes of senior management and other interest groups.Resolving conflict of interest between various groups.

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STRATEGIC MANAGEMENT ACCOUNTING

Budgeting

Budgeting and Time ScaleThe long-term financial plans will provide a context and a yardstick for all budgets of a shorter time. Research into corporate distress and failure reveals that failure to set and compare performance against a financial plan is an important warning indicator of lack of proper financial control.

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STRATEGIC MANAGEMENT ACCOUNTING

Budgeting

PlanningThis is a senior management job, entailing:Planning the deployment of physical resources to meet market opportunities.Planning the long term aggregate cash resources of the firm.Planning to increase the welfare of the various groups who have an interest in the firm.The success of budgeting will depend on the degree of involvement of all levels of management in the budgeting process.

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STRATEGIC MANAGEMENT ACCOUNTING

Budgeting

The overall budgeting process

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STRATEGIC MANAGEMENT ACCOUNTING

Budgeting

Forecasting

A number of decision variables involved in Planning will be outside the control of management at the time of drawing up the budget, because:They be exogenous to them firm (future demand, government interest rates policy, inflation, wage claims etc).

They are not expected to arise for a considerable period of time (eventual level of a novel product still in the early stage of development).

In these cases, forecasts have to be incorporated in the budget.

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STRATEGIC MANAGEMENT ACCOUNTING

Budgeting

Organizational ControlOnce budgets are agreed and implemented, actual results will have to be compared to budgeted figures. Differences will guide management in:Identifying areas of worse or better performance and deciding corrective actions. Rewarding individuals who have performed better than expected and punishing those who failed expectations.Deciding revisions to future plans and targets in the light of current actual results.

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STRATEGIC MANAGEMENT ACCOUNTING

Budgeting

MotivationOne of the most important spin-offs from the budgeting process is its use for relating performance to motivation. A number of theories try to explain what motivates individuals to perform to specified standards.Motivation through the satisfaction of personal need was first introduced by A. H. Maslow:Needs are the basis of the human drive to act.Human needs can be arranged in a hierarchy of relative prepotency.

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STRATEGIC MANAGEMENT ACCOUNTING

Budgeting

MotivationMaslow’s Hierarchy of Needs

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STRATEGIC MANAGEMENT ACCOUNTING

Budgeting

Authority of Senior Management

Because senior managers have the most discretion over the distribution of the firm’s resources, they will form the dominant group in any negotiation procedure. In highly bureaucratic organizations with formal “line management” systems the budgeting system will reflect the hierarch of management within the firm. The responsibility for different levels of budgeting can be clearly related to the different levels of managerial responsibility:

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STRATEGIC MANAGEMENT ACCOUNTING

BudgetingThe budgetary Flow

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STRATEGIC MANAGEMENT ACCOUNTING

Budgeting

Conflict ResolutionAny firm is a coalition of different groups with diverse interests and aspirations. The budgeting system can provide a means for resolving conflicts and producing the necessary consensus by:Providing a mechanism for negotiation.By directing the attention of the organization at different times to different aims (within a production budget, one month’s budget may be aimed towards enhancing the quality of materials, although another months budget may focus on cost cutting).