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C HAP TE R 1 4 Motivation, budgets and responsibility accounting Teaching tips and points to stress Major features of budgets There are costs (as well as benefits) of budgeting. First, managers often spend much time working on budgets. Studies of large companies suggest that about 5% of staff FTE positions are devoted to budgeting. Second, increasing uncertainty in the rapidly changing business environment makes it difficult to budget. Third, if the budget is rigidly implemented, employees may take actions
that will help meet the budget, but will hurt the company in the long run (e.g. deferring maintenance. Planning is setting goals and developing strategies to achieve these goals. Budgets show how resources will be deployed to implement their strategic plans. Budgets are planning tools, but there is more to planning than budgeting. To
evaluate current performance, management needs a standard or benchmark for comparison. The example given in Chapter 14 of the mobile phone company,
Mobile Communications, suggests two problems with using historical data as benchmarks for performance evaluation. First, historical data may encompass inefficiencies. Second, management usually expects the future to differ from the past. The advantage of historical data is that they are generally available at low cost. In contrast, budgeted benchmarks
maybe expensive to develop, but they can reflect anticipated changes and improved efficiency. If students are familiar with JIT (just in time) (discussed in Chapter 21), point out that JIT requires sophisticated coordination mechanisms. If production is to flow smoothly without stock buffers, each department’s inputs and outputs must precisely coordinate with the supplier and customer departments.
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